Call Start: 08:00
Call End: 08:54
Macquarie Infrastructure Company Trust (NYSE:MIC)
Q4 2012 Earnings Call
February 21, 2013 08:00 am ET
James Hooke – Chief Executive Officer
Todd Weintraub – Chief Financial Officer
Jay Davis – Managing Director Investor Relations
Ian Zaffiino – Oppenheimer & Co.
Andrew Gadlin – CJS Securities
Good day and welcome to the Macquarie Infrastructure Company Q4 2012 Earnings Conference Call. Today’s call is being recorded. At this time I’d like to turn the conference over to Mr. Jay Davis, Managing Director Investor Relations. Please go ahead, sir.
Thank you, Mimi. Thank you everybody for joining us this morning. Welcome once again to Macquarie Infrastructure Company’s earnings conference call, this one covering Q4 and full year 2012. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance and full-year results we’ve published a press release summarizing our results and filed a financial report on Form 10(k) with the Securities and Exchange Commission. These materials were released last evening and may be downloaded from our website at www.macquarie.com/mic.
Before turning the proceedings over to Macquarie Infrastructure Company’s Chief Executive Officer James Hooke, let me remind you that this presentation is proprietary and all rights are reserved. Any recording, rebroadcast or other use of this presentation in whole or in part without the prior written consent of Macquarie Infrastructure Company is prohibited.
This presentation is based on information generally available to the public and does not contain any material non-public information. The presentation has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument.
This presentation contains forward-looking statements and we may in some cases use words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. A description of known risks that could cause our actual results to differ appears under the caption “Risk Factors” in our Form 10(k). Our actual results, performance, prospects, or opportunities could differ materially from those expressed in or implied by the forward-looking statements.
Additional risks of which we’re not currently aware could also cause our actual results to differ. The forward-looking events discussed in this presentation may not occur. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation whether as a result of new information, future events, or otherwise except as required by law.
With that it is my pleasure to introduce Macquarie Infrastructure Company’s Chief Executive Officer, James Hooke.
Thank you, Jay. Good morning and thank you all for participating in our earnings conference call this morning. It’s a busy time of year with so many companies reporting results and we appreciate you taking the time to join our call.
It’s also been a busy start to the year 2013 here at MIC. Not only have we been preparing the accounts and reporting on our progress in 2012, we’ve been actively working on a number of significant strategic initiatives that I’ll be updating you on in a few minutes.
And as we announced earlier this morning we welcomed a new member to the MIC Board of Directors. Joining the MIC Board official as of today is Ms. Ouma Sananikone. Ouma brings a wealth of infrastructure-specific experience to MIC, having worked with some of the largest infrastructure investors in the world as well as a number of infrastructure businesses. Ouma joins our other very talented Board members in guiding the growth of MIC and its businesses and investments. On behalf of the team here at MIC we welcome Ouma and look forward to working with her in the years to come.
There are a number of significant elements in our results for Q4 and full year that I’ll address this morning. In an effort to keep it digestible I’ve broken these remarks into those pertaining to the MIC holding company including strategic initiatives, and those pertaining to our operating companies. I’ll cover the holding company matters first and then provide commentary on the performance and prospects of our operating companies.
Before that, however, let me just take a couple of minutes to summarize our results in 2012 and outlook for 2013 for those of you who may have other calls at this hour and want the cliff notes version. Our businesses performed well in Q4 although there was a quantifiable impact on both IMTT and Atlantic Aviation related to the impact of Hurricane Sandy of at least $0.10 per share. Including those effects, we reported an increase in proportionally combined free cash flow per share of more than 9% compared with 2011. Though short of our guidance, we’re comfortable that the reasons have nothing to do with the underlying performance of our businesses.
As we discussed last quarter, the successful refinancing of Hawaii Gas in the second half of the year was an important step forward for that business. Its debt was off-sized in the process and the average maturity of the debt was lengthened considerable with the inclusion of $100 million of ten-year notes in the package. This refinancing came with a small cost in the form of interest rate swap break fees. Paying the $8.7 million in fees in cash was a good long-term decision with a short-term negative effect on our results.
Similarly in Q4 we added a new subsector of infrastructure to our portfolio with an investment in two small contracted solar power generating facilities – more on these in a moment. While we believe that these will be fundamentally attractive investments the fees and expenses associated with the transactions resulted in another small non-operating expense in Q4. Neither the break cost of Hawaii Gas nor the investment-related expenses are reflective of the underlying performance of the business in 2012, however.
So, starting with our reported proportionately combined free cash flow of $3.45 per share and excluding these two items - $0.21 per share in total – shows that the operations of our business produced $3.66 per share in proportionately combined free cash flow for the year including storm-related costs. The storm related costs added up to at least $0.10 per share. Taking those into consideration it’s clear that our businesses delivered a fundamentally solid result for the full year.
Importantly we see the prospects for continued growth in proportionately combined free cash flow in 2013 as quite good. Our initial guidance for the coming year put proportionately combined free cash flow in a range of between $4.10 per share and $4.20 per share. At the midpoint of this range it would represent an approximately 13% increase on the $3.66 per share of underlying free cash flow generated in 2012.
The continued strength of the MIC share price resulted in material outperformance relative to our benchmark during Q4. Our manager has elected to reinvest the previously announced performance fees of $43.8 million. And although the satisfaction of the fee in additional shares renders it effectively a non-cash expense, it does flow through our P&L and so reduces our taxable income. As such, it has a positive impact in the sense that it helps perpetuate our federal income tax shield.
You can see the benefit of that manifesting itself in Q4 at the segment level in Atlantic Aviation and Hawaii Gas, where the tax provision has been reduced on a full-year basis. We now foresee having no material current federal income tax liability in consolidation through 2015 and into 2016.
With that as a quick summary of our performance and prospects, I’ll turn now to a discussion of several significant holding company matters. From an MIC corporate perspective and an MIC dividend perspective, our highest priority is the refinancing of Atlantic Aviation. It is the remaining legacy issue in front of MIC. We intend to refinance Atlantic in the next few months and have done a large amount of work and analysis already on the various options.
As I’ve said before, the timing of the refinancing is a function of the tradeoff associated with the cheap debt currently in place at Atlantic and the attractive debt markets we see today. While we are very happy to have an L+172.5 basis point cost of debt particularly when we think the business needs to reduce its debt load, the credit markets are currently favorable and we recognize that the longer we wait to undertake the refinancing the greater the risk that there may be some disruption in the credit market.
In light of all of this we believe that it’s likely we’ll complete the refinance of Atlantic Aviation before the end of Q2. As we’ve previously foreshadowed, to give Atlantic the optimal debt package on a go-forward basis in terms of both pricing and terms we will likely contribute a substantial amount of cash on the MIC balance sheet to optimize this refinancing. The good news is we have the cash and we can take a turn of leverage out of the business tomorrow if we choose to.
The reduction in balance sheet cash, currently used in part to support the MIC dividend, will be offset by the immediate access to all the cash being generated by Atlantic Aviation following the refinance. With unfettered access to the cash from Atlantic Aviation we feel that our Board will be in a very good position to consider increasing our quarterly cash dividend. To be very clear, refinancing Atlantic in this window is MIC’s highest priority.
In other holding company-level matters we continue to listen to our shareholders and try to develop additional ways of making our story more approachable. In this case we will be implementing a dividend reinvestment plan/stock purchase program or DRP. We expect to have the dividend reinvestment program in place by the end of March so that shareholders can reinvest their Q1 2013 dividend if they so wish.
We believe that a DRP will attract additional retail and smaller institutional investors. Moreover, the reinvested dividends will be available to fund further growth projects of our operating entities without drawing on the credit facilities of those businesses. In (inaudible ) terms it will allow us to modify the levered growth approach we employed historically. We’ll be able to continue to grow MIC’s businesses without increasing leverage over time. This will continue to de-risk MIC and it’s an important part of our capital management philosophy. A statement registering the shares for this plan, a so-called “universal shelf” will be filed with the SEC soon.
The final piece of holding company news is the completion of a small but interesting investment in a new subsector, contracted power generation. I’m very excited about our ability to generate attractive, risk-adjusted returns for our investors in this subsector. In Q4 we completed the acquisition of stakes in two contracted solar power generating facilities in the Western US.
The facilities, each indicated in the US Southwest near Tucson, Arizona, and Presidio, Texas, respectively are photovoltaic arrays capable of generating a combined 30 MW of power. The 20 MW facility in Arizona is complete and operational and the 10 MW facility in Texas should be becoming operational in April.
Together, the facilities are capable of generating enough renewable power to supply more than 6000 homes. The investment provides us with good visibility into its cash generating capacity. The power being produced is the subject of long-dated power purchase agreements with regional utilities of investment grade quality under which the utilities are required to buy all of the energy produced. The agreements are for 20 and 25 years.
We invested a total of $9.4 million in the two facilities. We expect to receive distributions of $1.2 million plus a return of capital of approximately $3.5 million in 2013. After the return of capital our net investment will be $5.8 million. So it’s a small investment. The deals have been funded in part with fully amortizing debt from the North American Development Bank, the NADB, that lasts the life of the power purchase agreements so there’s no refinancing risk over the period of the investment.
We made our investments alongside Chevron Energy Solutions, a division of Chevron USA. The investment is structured in such a fashion that while our ownership interests will vary over time, we expect to receive a disproportionate share of the cash flows relative to our investment while our co-investor is expecting to receive a disproportionate share of the tax benefits.
Chevron is an excellent party for us to be in business with. We have a similar long-term investment horizon; we have a similar commitment to safety and operating excellence; and we have a corporate relationship from our respective businesses in Hawaii. We’re proud that Chevron has chosen to work with us on this venture.
We think the solar power generation investments are a great complement to our other infrastructure businesses. They possess a number of key characteristics of the asset class we find attractive. Notably, they’re made up of high-value, long-lived physical assets – in this case, the photovoltaic panels – and there are virtually no moving parts, thus maintenance capital expenditures are minimal. Nevertheless, operations and maintenance of the facilities will be the responsibility of an experienced third party, Sun Edison.
In each case, we assumed no terminal value at the end of the contracted off-take. As well as having attractive 20- and 25-year RIRs, the deals will be yield accretive and are tax effective now for MIC given our tax status; and introduce us to an investment class that could provide tax shield benefits in the future if and when MIC requires such benefit.
I’m pleased that we’ve been able to invest in solar at a time when it’s not sexy to do so. The sector in my view was overpriced a few years ago with the froth and bubble surrounding renewables. Following the bursting of that bubble it has again become a rational place to invest.
As noted in the materials that we filed last evening, the MIC solar investment does not constitute a reportable segment under GAAP. Consequently we’ve recorded the impact of the investment as a component of the corporate segment in our consolidated financial results. We’re pleased with our investment in solar.
I want to emphasize again that the net investment is only $5.8 million. People should not interpret this as meaning that MIC has opened the checkbook and is actively shopping. As I’ve stated earlier, our corporate focus remains refinancing Atlantic Aviation to free up the cash flow from Atlantic to allow us to increase our dividend. However, the window to form this relationship with Chevron occurred in Q4 2012 so we seized the opportunity. With Atlantic refinanced we may see if there are other similar opportunities in the space.
With those holding company matters in mind, I’ll now discuss the performance and prospects of each of our operating companies. Overall, I would characterize Q4 2012 as slightly softer than anticipated as a result of Hurricane Sandy at the start of November which impacted our free cash flow by at least $0.10 per share. It was Hurricane Sandy that caused the softness. The first three quarters of the year were strong enough, however, to produce full-year cash flow per share results consistent with our guidance.
Absent the storm, 2012 could have been a banner year. As it was, the 2012 results including a more than 9% year-on-year increase in proportionately combined free cash flow per share mark a continuation of the positive trends we’ve seen underlying each of the businesses over the last few years. Let’s first look at Hawaii Gas.
At Hawaii Gas, total contribution margin increased nicely in both Q4 and for the full year. Contribution margin rose 6.8% in the quarter and 13.9% on the year. The unregulated portion of the business benefited from a lower cost of propane that more than offset both higher costs and a slight decrease in the volume of gas sold. The volume decrease was the result of a commercial customer being offline while certain equipment was being refurbished and supply disruptions from the local refineries.
Hawaii Gas finished 2012 strongly, generating growth in EBITDA excluding non-cash items of better than 9% in the quarter and nearly 15% for the year. The quarter included a slight decrease in non-utility revenue due to that commercial customer in Kauai being offline for much of the period but it was more than offset by a decrease in propane costs. The Kauai customer is now back online.
For the year, the total volume of gas sold by Hawaii Gas increased by about 2%. The improved performance was driven by continued recovery in the Hawaiian economy and an effective job of marketing Hawaii Gas on the part of the team there. The regulated portion of the business reported growth in volume of fuel sold and a slight increase in contribution margin. Free cash flow for the quarter and the full year results was up substantially as a result of the improvement in operating results.
Hawaii clearly benefited from strong tourism numbers in 2012 and broadly speaking a healthy overall economy. Although there’s not a perfect correlation between tourism and the volume of gas sold in Hawaii, it certainly helps to have the hotels, laundries, and restaurants doing well.
In addition to transportation costs, certain other expenses increased during 2012. For example, labor-related costs in production, transmission and distribution increased. Medical and other benefits costs in particularly are rising rapidly and will be an area of focus for us in 2013 as we look for ways to control the rate of growth in these items. These offset a portion of the gains in contribution margin.
Hawaii Gas also incurred costs in connection with the rebranding of the business and in preparation of its filing with the Federal Energy Regulatory Commission, the FERC, for LNG importation in 2012. Although the regulatory expense and the cost of equipment related to LNG projects are likely to be relatively modest over the near term, they won’t go away completely until we have our LNG initiative up and running.
Related to this, the FERC declined to assert jurisdiction in response to Hawaii Gas’ filing regarding federal oversight of the transportation of containerized LNG from the US West Coast to Hawaii. The Commission cited the use of industry-standard equipment and a facility that already handles a variety of containerized cargo, not an LNG import facility specifically, as the reason for their decision.
Near-term, the decision means that subject to obtaining required local approvals Hawaii Gas could be shipping LNG to Hawaii soon, possibly within the next few weeks. Longer-term the FERC may again be a factor if for example Hawaii Gas determines the only economically sensible way to move LNG into the Hawaiian market is not by container but by gas ship and into a purpose-built storage facility. Above all we hope that the planned importation of LNG facilitates a robust dialog amongst politicians, regulators, the public, and other constituents with respect to the future of Hawaii’s energy complex.
In an unsurprising move, Tesoro announced in January that they intended to shut down their refinery in Hawaii and seek to convert the facility to an import terminal. Tesoro has sent Hawaii Gas notice of its intent to cease supply of naphtha propane concurrent with their refinery shut down. Tesoro provides all the naphtha that Hawaii converts into synthetic natural gas for the regulated utility and about one-quarter of the propane distributed by the unregulated business generally and the regulated business on the outer islands.
While the announcement of the refinery closure was unsurprising, what was a little surprising was that Tesoro only gave 90 days’ notice rather than the 100 days’ notice they had previously committed to provide. This refinery closure is something that we and Hawaii Gas have anticipated and foreshadowed for some time, and contingency plans that will allow the business to meet its obligations to its customers are being executed.
First on the list is finding a replacement source of feedstock for the regulated side of the business. We should be able to source a sufficient amount of feedstock from Chevron, the other refinery in Hawaii, and our partner in the solar venture. We can also import a sufficient quantity of naphtha – it’s a globally traded commodity – and have access to appropriate storage facilities in Hawaii to do this. We can also supplement the pipeline gas stream with propane and of course with LNG when we’ve secured the necessary approvals.
In short we’re confident we’ll be able to continue to meet the needs of our customers for clean, reliable gas service. The Hawaiian Public Utility Commission regulations generally permit the pass through of feedstock costs to the customer just as we do now with fluctuations in the cost of naphtha.
In looking at the expected performance of Hawaii Gas over the coming year we assume that the economic backdrop remains favorable, that Hawaiian economic activity remains strong and that the US economy doesn’t tip back into recession. We’ve also assumed that we’re able to preserve the relative cost advantage of gas versus competing energy sources in Hawaii.
With these we expect the business to generate EBITDA of between $57 million and $63 million in 2013. At the midpoint of this range the year-on-year increase would be about 6.5%. While this is lower than the 14.8% EBITDA growth we experienced in 2012 and the 18.9% per annum EBITDA growth we’ve experienced since 2008 it doesn’t seem prudent to view this as a business that can continue to grow its EBITDA at high double-digit percentage rates per annum in perpetuity. We hope that it can, and let’s be clear – if we get to the top of our guidance range we will again be in double-digit percentage growth rates, but we’re pairing back our growth guidance a little.
Importantly, the refinancing of Hawaii Gas last August and the reduction in interest expense that came with it is likely to drive meaningful improvement in free cash flow in 2013 even if nothing else changes from an operating performance point of view. Trading through January at Hawaii Gas has been more than consistent with our outlook. The price of propane remains stable and relatively low and demand is up slightly on 2012.
IMTT – at IMTT, terminal revenue increased by 9.7% and 7.8% in the Q4 and full year periods respectively compared with the same periods in 2011. The improvement on the full year highlights the continued increase in average storage rates and an increase in the amount of storage in service. Storage rates rose 7.6% in the quarter and by the expected and previously foreshadowed 7.0% for the full year.
IMTT continues to enjoy pricing power in its key markets primarily as a result of the demand being created by the unconventional oil and gas discoveries around the country. Liquids are making their way to the refineries in the Northeast and providing certain of these with an extension of their useful life. Similarly, products are finding their way into the petrochemical complex along the lower Mississippi and driving demand for storage.
As is the case for all of our businesses, performance is a function of volume and margin. Volume in the context of IMTT is capacity and capacity utilization. Utilization declined in Q4 2012 to slightly under 93%. This was a result of having a particularly large tank, a 500,000 barrel tank, out of service for cleaning and inspection. We only have four 500,000 barrel tanks at IMTT.
A relatively lower level of utilization is expected to persist while this tank and another of the same size are being serviced. The actual percentage utilization rates will vary from quarter to quarter as new capacity is commissioned and the tanks come back online from cleaning, thus changing both the numerator and the denominator in the utilization calculation.
Partially offsetting the terminal operation result for 2012 was a below-normal contribution from OMI, the previously Oil Mop environmental services unit. As we have seen over the past years, financial results at OMI can and do vary widely depending on the spill activity in a given year. There wasn’t a lot of cleanup activity in 2012 and environmental services gross profits declined by nearly 60% compared with 2011. Conversely, OMI has started 2013 slightly more strongly. It’s the only part of IMTT’s earnings that are volatile.
Expenses were higher in Q4 in particular and up slightly for the full year. The majority of the increase was a direct result of Hurricane Sandy although a portion is also attributable to the previously announced conversion of some of the fuel oil storage at Bayonne to clean product storage. The conversion of some 1.2 million barrels of storage capacity in Bayonne from residual oil to [true] oil generated expenditures associated with the cleaning of the tanks and related pipelines. While a short-term drag on earnings, these conversions should have a positive impact on IMTT’s results on a present-value basis.
As a result of the storm-related costs and the increase in maintenance capital expenditures, IMTT’s free cash flow declined by 36.0% for the quarter but increased 9.7% for the full year. Excluding the storm damage-related costs, free cash flow for the year would have increased by approximately 13.0%.
There are a number of important initiatives underway at IMTT during Q4 and into 2013. The first of those I’m pleased to report was the receipt of a distribution for Q4 from IMTT. A $12 million distribution was made to each of the two shareholders of IMTT in late December. As was the case with many public companies at year-end, the distribution was made in part as a result of the discussions underway in Congress at that point and the anticipation of higher tax rates in 2013 compared with 2012. While this made no difference to MIC from a tax perspective, our co-investor was keen to get cash out of IMTT before the end of the tax year and we were happy to help.
As reported in our earnings press release last evening IMTT completed a refinancing of its revolving credit facility last Friday. The business put in place a new $1.04 billion facility with a maturity date of February, 2018. The facility that it replaced was a smaller facility that would have matured in June of 2014. The new facility also increases the maximum allowable leverage ratio from 4.75x net debt to EBITDA to 5.00x net debt to EBITDA.
At closing, the drawn balance on the new facility following repayment of the old facility was $752 million, so we have just under $300 million of undrawn capacity. It’s great that we have extended the refinancing maturity of IMTT to 2018. The undrawn balance of the revolver is available to fund additional growth opportunities and to pay distributions consistent with the shareholders’ agreement. IMTT will also pursue an additional $250 million of debt in the form of bonds or senior notes. In addition to providing greater financial flexibility, the increased borrowing capacity will expand IMTT’s ability to fund even more growth opportunities in the future if we think they are attractive and prudent.
The reporting cycle effectively bifurcated the fundraising activities of IMTT. The first portion, the renewal of the revolver, has been completed. The second portion, securing an additional $250 million of debt is underway, and we look forward to reporting on a successful conclusion of that effort very soon.
Concurrent with the closing of the new debt package, we and our co-investor in IMTT signed an amendment to our shareholders’ agreement. The amendment has two components. The first replaces the section of the shareholders’ agreement that specified the required reserves of the business and replaces it with a specific amount - $185 million in cash or undrawn facilities be available at all times. The second amendment grants either shareholder the right to prompt injunctive relief if there is a dispute over dividends. This was important to MIC as a means to faster resolution of any future dispute.
All other elements of the agreement remain unchanged, including the requirement that the business distribute all free cash flow each quarter and be levered to not less than 3.75x trailing net debt to EBITDA. The combination of the accelerated Q4 dividend, the refinancing, and the amendment of the IMTT shareholders’ agreement have the effect of further de-risking IMTT. Along with the fact that IMTT is current with all of its distribution agreements, these factors and our partner’s stated desire to put the dispute behind us give us increased confidence that we will continue to enjoy regular distributions from the business and explore opportunities for further growth CAPEX.
In sum, IMTT delivered a good year in 2012, and but for the storm impact it would have been a great year. Looking ahead we foresee IMTT generating between $260 million and $270 million of EBITDA in 2013. A substantial portion of the increase is linked to the full-year impact of new storage that was commissioned in December, 2012, as well as the benefit of new capacity that’s expected to be commissioned in 2013. On top of this of course is the impact of any pricing increase that IMTT is able to put through during the year.
At the midpoint of our guidance for 2013 IMTT would generate an increase in free cash flow of approximately 14.5% over 2012. At this point we are repeating our conservative guidance for 2012 as the 2013 guidance for storage pricing and believe that average storage rates will increase in the range of between 5% and 7% for the year. Keep in mind that the average is driven by roughly one-quarter of all contracts that are scheduled to renew during the year. Trading at IMTT through January has been better than 2011 and consistent with the guidance I’ve described.
District Energy – Chicago called off on a relative basis in Q4 2012 compared with Q4 2011. As a result, consumption revenue was down in Q4 although up better than 4% for the full year. The full year increase in both consumption and capacity revenue were partially offset by the decrease in other revenue and finance lease revenue. Other revenue declined as a result of a decrease in the payments received by the business in connection with its management of electricity use during periods of peak demand. The decline in finance lease revenue reflects the predictable decrease in the portion of lease payment received by District Energy that is interest income and recorded in the P&L versus principal payments that flow through the cash flow statement.
Maintenance capital expenditures were higher in 2012 than in 2011 but only because of the timing of seasonal maintenance efforts. Maintenance CAPEX rarely change from year to year and runs at about $1 million, and we look for more of the same in 2013. We expect the business to generate approximately $20 million in EBITDA for the year absent any major variations from the norms for temperature and humidity in Chicago.
We do not expect to undertake refinancing of District Energy prior to the end of this year so the cash generated by the business in 2013 will be used to reduce debt. This is the low season in Chicago in terms of demand cooling, although District Energy’s performance to date this year has been consistent with our guidance. Please remember that we have a 50.01% interest in this business.
Atlantic Aviation – similar to IMTT, Atlantic Aviation was adversely affected by the storm on the East Coast in November although its results for the full year illustrate a continuation of trends we’ve seen going back to 2009. The recovery that we observed commencing in 2009 continues. Four bases in the Northeast were closed for some period of time following the storm including Teterboro, which is the busiest general aviation airport in the world.
Aggregate fuel gross profit declined in Q4 2012 compared with Q4 2011 as a result in the decrease of general aviation flight movements during and after Hurricane Sandy. On a full-year basis, Atlantic generated growth in fuel gross profit, total gross profit, and EBITDA at rates in excess of the industry’s fundamental driver, namely flight movements. So the gross profit, the EBITDA, and the fuel gross profit all grew faster than the industry’s takeoffs and landings.
Flight movements as reported by the FAA were down fractionally for the year, about 0.3%. We attribute the success of Atlantic in this environment to the extent to which the market accepts its value proposition as well as the popularity of the destinations at which it operates.
As I’ve noted on previous calls, because we’ve both bought and sold FBOs in the last year a same-store view of the business is most appropriate. On a same-store basis the volume of general aviation jet fuel sold by Atlantic increased 2.7% in 2012 compared with 2011. In addition, the average margin on these sales increased by 1.2%. The resulting increase in same-store fuel gross profit was partially offset by decreases in non-fuel and non-general aviation gross profit. In particular de-ice revenue declined by more than half during 2012 compared to 2011.
Management at Atlantic has again done a very good job of keeping SG&A costs in check. Normal wage and benefit inflation was offset by reductions in the cost of insurance programs and a sizable reduction in credit card fees. All told the management team managed to bring the SG&A in below $175 million for the third consecutive year.
As we reported in November, all the excess cash generated by Atlantic Aviation is being used to pay down the debt. Atlantic Aviation paid down an additional $13.5 million of debt last week. Had that payment been made at the end of the quarter the leverage level of the business would have been reduced to 5.45x at that point.
Atlantic Aviation is off to a good start in 2013. Activity levels and EBITDA generated through the middle of February were consistent with our expectations and de-icing revenue has recovered somewhat from last year’s extraordinarily mild winter. Absent substantial changes to the makeup of the Atlantic portfolio, we expect the business will generate between $137 million and $145 million of EBITDA in 2013.
The key to cash generation on the part of Atlantic Aviation will be the point during the year at which we are able to refinance the business. As I mentioned a moment ago, we assume that we will complete the refinancing by the middle of the year.
That’s a look at our operating businesses, their performance to date and their prospects for the full year of 2013. Once again, I would characterize Q4 as good but a little softer than we had hoped because of the hurricane here on the East Coast. However, the strength of the first three quarters of the year enabled us to deliver our free cash flow guidance excluding the non-operating items associated with the Hawaii Gas refinance and the acquisition of the solar power generation facilities.
We’ve taken some important steps forward with each of our operating businesses; for example, the refinancing of IMTT’s revolving credit facility and the amendment to the shareholders’ agreement, and the progress we’ve made on LNG initiatives in Hawaii. And our expectation is the business will continue to generate cash and growth in free cash flow at an attractive rate.
In addition, we have and expect to continue to expand our business with investments in an exciting new subsector in the asset class. Our investment in contracted solar power generation is expected to deliver attractive risk-adjusted returns for our investors while providing electricity to 6000 households. This is a great example of doing well for the communities and doing well for our business.
Thank you for your support and your continued confidence in our ability to deliver on our commitment to building shareholder value. At this time I’ll ask that our operator open the phone lines for your questions, and our CFO Todd Weintraub and our Investor Relations head Jay Davis and I will be happy to answer any questions that you may have.
Thank you. (Operator instructions.) Our first question comes from the line of Ian Zaffino of Oppenheimer. Your line is open.
Ian Zaffiino – Oppenheimer & Co.
Great, thank you very much. A question for you on the unregulated side of the gas company, can you talk about the dynamics of gross profit or EBITDA as raw material cost and the price of your feedstock declines? Are you able to hold the price? Do you have to give back the price? We know how the regulated side works but how does it work on the unregulated side?
That’s a good question. On the unregulated side we manage our margin vigilantly and diligently. There is no regulatory need or contractual need to pass through any reduction in the cost of the commodity to us, so to the extent that we’re able to lower that commodity cost through either a movement down the [Mont Bellview] index on which most of the supply contracts are based or through enhanced negotiation and operating improvements we have the decision there of how much will we pocket versus how much of that will we give in lower retail prices with a view to accelerating the volume growth of the business.
So during 2012 I think our retail price was relatively constant and so a chunk of that benefit accrued to us. Part of the way that we’re able to lower the commodity costs has been an investment in storage in Hawaii and the reason that that’s lowered the commodity cost for us in a sense is that it’s allowed us to bring in bigger foreign fuel shipments; and as we bring in larger shipments we get better economies of scale so lower unit costs. You can only bring in those large shipments or larger shipments if you have the storage facilities to deal with them when you offload them, and so that’s I would say a lesson that we have taken from IMTT and our experience in owning IMTT and the storage there and are applying to lowering our commodity costs in Hawaii.
Ian Zaffiino – Oppenheimer & Co.
Okay, perfect. And then on the likely guidance, does that assume a refi and what would it look like under a refi scenario, the guidance?
Yeah, so I guess there’s two assumptions in the guidance that we’ve given. The first is as to the timing of the refinance and the second is to the terms on which we refinance the Atlantic debt. On the timing the assumption we made was that we refinance it on the 30th of June, 2013, so we picked the middle of the year – so we keep the existing debt package for the first two quarters and we get the new debt package for the second two quarters. In terms of the margin that we’ve assumed in the second half of the year for the refinancing of Atlantic we’re not going to disclose that, and the reason we’re not going to disclose that is we’re in discussions with a number of lenders and whatever figure they quote to me is obviously outrageous and will continue to be outrageous. So we’re not giving any guidance on that.
The other would be that obviously the business de-levers during the year, so you have reducing principal on that. So I guess a cute way of saying, for want of a better term, I can give you the guidance is we assumed the middle of the year and as for the rate for the second half people are going to have to make their own assumptions because I don’t want to give specifics on that yet.
Ian Zaffiino – Oppenheimer & Co.
Okay, but to be clear the refi is in the guidance.
Ian Zaffiino – Oppenheimer & Co.
Okay, alright. Thank you.
Thank you. Our next question comes from Andrew Gadlin of CJS Securities. Your line is open.
Andrew Gadlin – CJS Securities
Good morning. On the $0.10 impact from Hurricane Sandy, can you break out what portion of that affected comes from IMTT and what portion affected AA?
The answer to that is Jay said he would kick me if I got into the breakdown of AA versus IMTT, so in one sense whilst I can I’m not allowed to is the way I would characterize it.
Andrew Gadlin – CJS Securities
Sorry for putting you at risk.
That’s okay – it’s an occupational health and safety issue which I take seriously. Let me give you some sort of qualitative guidance without specific numbers. At IMTT, there were insurance deductibles that came in which I think we’ve previously disclosed at $2 million. There was dredging expense as we needed to dredge around the piers that we have. Obviously with the trough in front of us being at 45 feet, to take vessels of that size we need to ensure that we’ve dredged around the two piers that have 45-foot troughs and so we’ve incurred dredging expense there.
There was a massive amount of rubbish that accumulated under the surface as a consequence of that storm so there was some expense there, and there was a decline of throughput revenue in November/December while things were offline and while there was equipment that was offline that we normally bill for. At Atlantic Aviation there was you know, a lower order of magnitude of impact, and that lower order of magnitude of impact was essentially a $300,000 insurance deductible. There was clearly a loss of flight activity. What I would say is the impact of that is disproportionately at IMTT that at Atlantic – that’s probably as comfortable as I’m going with Jay scowling at me.
Andrew Gadlin – CJS Securities
Okay, thank you. Again, for IMTT, there’s a comment in your guidance section that there are two large tanks that will be taken offline. Are these two of the four 500,000 gallon tanks?
Yes, they’re 500,000 barrel, not gallon. There’s one that’s offline now and once we’ve finished that we’ll put it back in service, and then another will come offline after that. So we’ll get a little, the lumpiness in the utilization bouncing around will be a little greater this year as we do those two, as we clean those.
Andrew Gadlin – CJS Securities
When will the first one be back online?
Two answers to that: the first is we don’t actually know with any degree of certainty and the second is it probably wouldn’t be helpful for me to give guidance around that anyway.
Andrew Gadlin – CJS Securities
Okay. If both were out of service at the same time would the impact be large enough that we would see it in the results on any given quarter?
No, I don’t think you will see that in any given quarter. I don’t think you will. I think it will relatively seem like business as usual this year but people may ask why the utilization is bumping around more than normal, “Is there any underlying trend we should read into that?” and our answer is no underlying trend. The guidance we’ve provided fully takes all of that into account, and if you end up getting some level of overlap which I am very confident you won’t we’ll detail that and specify that when it occurs but I don’t think you’ll see it.
Andrew Gadlin – CJS Securities
Okay. And as we move ahead to 2014 or even just the end of 2013, are there any more of these large-type tanks that will be coming offline?
Not in 2013, no I don’t think so. As to whether we do the others in 2014 or 2015 it’s somewhat opportunistic depending on when the contracts come up for renewal and we go into the tanks to take them offline.
Andrew Gadlin – CJS Securities
So it’s unclear whether 2014 is the year that utilization picks back up?
Yeah, I mean I think if you model that 2014 is the year that it picks back up and if during the year we think that’s going to change we’ll provide some guidance on that.
Andrew Gadlin – CJS Securities
Okay. And in terms of your guidance on NOLs being able to shield taxable income through 2015 and into 2016 does that include only your NOLs accumulated to date or does that also incorporate your view on what you’ll accumulate in the next couple of years?
It’s a holistic picture which sort of takes us forward to that timeframe but I’d basically say given that we’re net income positive today essentially our view is that we’re going to keep chewing into those. We haven’t taken any assumption that there’s any sort of initiative we’re going to do that’s going to generate other NOLs. The context I’d give around this however is the fact that we say today that it’s going to be into 2016 is the guidance and the visibility we have today. I would be very disappointed if we can’t extend it beyond 2016 through initiatives and actions that we take. All we’ve got to date that we can give you is through the actions we’ve taken already it’s pushed out to 2016 but obviously our intent is to perpetually do that.
Now, to put that into historical context, when I started as CEO in April, 2009, we gave guidance that we would run through our NOLs by 2012. We’re now past 2012 and we’re saying we’ll run through them in 2016. So you know, I view this as something that we are perennially working to push back and the guidance we’ve given is that to date we’ve been able to push it back till 2016. There’s more work and more [whipping] of people here to push that back further.
Andrew Gadlin – CJS Securities
Thank you very much.
Thank you. I’ll hand the call back to Jay for closing remarks.
Thank you everyone for your participation in our call and for your continued support of MIC. As always, we welcome your comments and follow-up questions. I’d like to thank the lenders to all our businesses especially the new lenders who have come into our facilities in Hawaii and IMTT. They’re key business partners for us and I enjoy working with them to grow and strengthen our business.
And thank you to the management and staff and personnel in all of our businesses who continue to work as hard and as passionately as they can to improve our business. I’d especially like to thank my executive assistant [Shive Franklin] who’s off to have baby #2 for her work and patience and tolerance in enduring me, and I’d like to thank our Corporate Counsel Mike Kern who’s had a very busy quarter both preparing the 10(k), getting the shelf ready for filing for the dividend reinvestment plan, and helping negotiate the amendments to the shareholders’ agreement at IMTT – a particularly busy quarter for the Corporate Counsel.
We look forward to providing you with an update on our results for Q1 in May or prior as events may require. As always, please feel free to contact us with any questions you have along the way and any suggestions.
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