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Macquarie Infrastructure Company LLC (NYSE:MIC)

Q2 2013 Earnings Conference Call

August 1, 2013 08:00 a.m. ET


Jay Davis – Managing Director, Investor Relations

James Hooke – Chief Executive Officer


Ian Zaffino – Oppenheimer & Co.

Brendan Maiorana – Wells Fargo Securities

Alex Knight – Tiger Management


Good day ladies and gentlemen, and welcome to the Macquarie Infrastructure Company Second Quarter 2013 Conference Call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Jay Davis, Managing Director, Investor Relations. Please go ahead.

Jay Davis

Thank you Babul [ph], and welcome once again everyone to Macquarie Infrastructure Company’s earnings conference call, this one covering the second quarter of 2013. Our call today is being webcast and is open to the media.

In addition to discussing our quarterly financial performance on this call we’ve published a press release summarizing our results, and filed a financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening and maybe downloaded from our website,

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 Forms 10-K and 10-Q. Our actual results, performance, prospects, or opportunities could differ materially from those expressed in or implied by the forward-looking statements.

Additional risks of which we’re not currently aware could also cause our actual results to differ. The forward-looking statements and 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.

James Hooke

Thank you, Jay, and thank you to those on the line participating in our earnings conference call. We appreciate you taking the time to join our call, especially given the number of calls that take place during this particular week. For those of you who may have the need to participate in multiple calls this morning, I will begin with a quick summary of our results, before moving to a more detailed commentary.

In terms of the headline news, we report this quarter that first, we are increasing our quarterly dividend by 27.3% to $0.875 per share from $0.6875 per share, or more simply to $3.50 per share per year from $2.75 per share per year.

Second, we are reaffirming all of our guidance for 2013, including free cash flow per share for MIC, as target EBITDA for each of our operating businesses. Third, we have grown proportionately combined EBITDA by 9.7% versus Q2 2012, and our proportionately combined free cash flow per share by 7.3% versus Q2 2012.

For the six months, proportionately combined EBITDA was up 12.2%, proportionately combined free cash flow was up 22.1% in total, and proportionately combined free cash flow per share is up 15.1%.

Four, MIC’s leverage has been reduced substantially to 3.5 times net debt to EBITDA on a proportionately combined basis from 4.3 times net debt to EBITDA at the end of the prior comparable period. MIC is now rated investment grade. Fifth, we have more than $100 million cash on hand to fund growth projects in our existing businesses, and we have expanded our portfolio of contracted power generation facilities with an additional acquisition.

We temper all this good news with two operating matters. First, we experienced a slight decline in volume of gas sold through our Hawaii Gas business, something we believe is a timing issue rather than underlying volumes decline. And second, IMTT’s maintenance capital expenditures were substantially higher than anticipated. The 2013 incremental maintenance Capex will reduce free cash flow by between $0.20 and $0.25 per share.

We do not expect that this will happen again in 2014.

We are at a run rate at the top of our proportionately combined free cash flow per share guidance range. So while we have achieved a lot in the quarter and the result for the half was positive it could have been better. Without the IMTT 2013 maintenance Capex issue we would have been in a position to upgrade our guidance.

As we have indicated, with our results for the first quarter of 2013 with the successful refinancing of Atlantic Aviation, we had stated that subject to continued stable performance of our businesses and stability in the broader economy, our board would increase the MIC quarterly dividend from $2.75 annualized to $3.50 per share annualized.

We have now done that. As you know, our policy is to first payout a significant portion of the free cash flow generated by our businesses as a quarterly cash dividend, a payout of between 80% and 85% of the underlying proportionately combined free cash flow generated by our businesses. And second, to increase our dividends over time as and when our free cash flow per share grows and our board is confident that an increase is both prudent and sustainable.

As I noted in my summary, our businesses have continued to perform well and the economy continues to expand. So the MIC board determined that our increase in quarterly cash dividend is appropriate. The newly authorized dividend will be paid on August 15 to shareholders of record on August 12.

At the midpoint of our 2013 guidance of $4.10 to $4.20 of proportionately combined free cash flow per share, the $3.50 per share annual dividend represents a payout ratio of approximately 85% of the free cash flow, and is consistent with our target. Keep in mind that our discussion of the per-share metrics will reflect the dilution from both the base management and performance fees that are being satisfied in additional shares, and the equity offering we conducted in May.

Even with these additional shares on issue, however, we believe the improved performance of our business will generate year-on-year growth in free cash flow per share, consistent with that of the past several years. At the midpoint of our guidance that would be about a 13% increase over our 2012 result per share.

That is the end of the high-level summary for those of you with other calls this morning. Turning to our operating businesses now in more detail firstly, Atlantic Aviation. Atlantic had a good quarter. Gross profit growth at Atlantic was driven by an increase in the number of general aviation flight movements this year compared with last. The increase in flight movements translated into a 4.4% rise in gross profit, which when combined with effective cost management saw EBITDA at Atlantic grow by more than 11% versus the second quarter of 2012.

We also benefited from a lower debt balance and a lower cost of debt at Atlantic Aviation this year versus last. And combined with the improved operating performance, free cash flow grew by just under 80%. To be fair that result included a debt cost of just LIBOR plus 1.725% for two months out of the quarter compared with the cost of approximately 6.6% at this time last year.

However, even adjusting for the lower debt balance and the lower all in swapped debt cost of Atlantic underlying free cash flow rose by 13.5% year-on-year at Atlantic this quarter. We are confident with respect to the performance of Atlantic over the second half of the year, and have reaffirmed our EBITDA guidance for the year or for that business in a range of between $137 million and $145 million for 2013.

With $70.9 million of EBITDA generated in the first half, we are clearly well on track. General Aviation flight activity in the US was up each month during the second quarter according to information reported by the FAA. Now as I have said in the past, the information from the FAA tends to be directionally accurate, but because of differences in the size of the underlying sample fits, not always a precise reflection of what has happened in Atlantic Aviation.

In this case however the correlation was not too bad. The FAA data showed flight activity up by about 1.8% per month in the second quarter of 2013, compared with the second quarter of 2012. Atlantic Aviation’s own analysis of flight activity at the airports on which it operates showed an increase of 2% on a same store basis.

As I have noted in the past, we think Atlantic’s relative out performance versus the industry speaks to the popularity of destinations at which Atlantic operates, and the business’ safety and customer focused culture. Importantly, data from Atlantic also indicates that the business is gaining market share on the airports at which it operates.

The increase in traffic led to growth in the volume general aviation jet fuel sold during the period. On a same-store basis general aviation jet fuel sales increased by 2.9%. Margins on those sales improved as well, expanding by 3.6% versus the prior comparable quarter.

Because we have been buying and selling FBOs in small number, but consistently over the past couple of years, I think comparisons on a same-store basis remain the most sensible way to look at Atlantic’s underlying performance. They are the metric that I use to manage the business.

The management team at Atlantic Aviation continues to do a very good job of controlling the expenses. SG&A was flat with the last year for a quarter and is up only a fraction of a percent on a year-to-date basis. Normal inflationary increases continue to be offset with improvements in efficiency. We are pleased that a 2% increase in flight activities at the airports in which Atlantic operates generated an 11% growth in EBITDA for the quarter.

Atlantic Aviation benefited from a lower debt balance and lower cost of overall debt in the second quarter and year-to-date periods that was the case last year. Remember for the first quarter and the first two months of the second quarter Atlantic Aviation was paying interest at a rate of just L+1.725% as a result of the expiration of interest rate hedges last October.

As you will be aware by now, Atlantic Aviation’s long-term debt was successfully refinanced during the second quarter. We used the proceeds of an equity offering to pay down -- to pay the debt down to $465 million. We then raised new debt at Atlantic to repay the remainder of the old facility, and provide a revolver for the future growth needs of the business.

The new seven-year $465 million term loan bears an interest rate of L+2.5%. Atlantic Aviation also has access to an additional $70 million of revolving debt for a period of five years at the same rate. Atlantic Aviation’s floating rate exposure on the long-term loan was hedged away using an interest rate swap that became effective yesterday.

Including the swap, the holding cost of the term loan portion of the new debt is now 4.7%. As noted a moment ago, the swap rate on the old facility had been approximately 6.6%. We’re pleased with how Atlantic has capitalized at this point and comfortable that we have the flexibility to support additional growth in the business, particularly as the Atlantic is now able to make regular distributions to MIC.

Trading through July at Atlantic has been consistent with our expectations. Although I would note that the summertime leisure travel is a bit less predictable than travel during other times of the year. But based on what we have seen in the first half and through July, we are very comfortable with the prospects of the business to maintain our EBITDA guidance for the full year of between $137 million and $145 million.

Moving to IMTT, IMTT had a good quarter from an EBITDA perspective, but a bad quarter from a maintenance Capex perspective. IMTT’s performance for the quarter reflected a continuation of the trends as forecast by us at the start of the year. Storage rates rose by 6.5%, consistent with our guidance of 5% to 7% for the year, and storage utilization improved sequentially but remains below historical norms.

As we have said previously, the lower utilization was expected as a result of some large 500,000 barrel tanks being removed from service for scheduled cleaning and inspection. The top line growth continued to an increase in EBITDA of 19.4% compared with the second quarter of 2012 and 14.7% for the first half.

However of the 14.7% growth some $2.5 million relates to a correction of IMTT’s accounting in Q4 2012, which we rectified in Q2 when we became aware of it. Excluding this correction, underlying EBITDA was up year-on-year for the first half by approximately 13%. Year-on-year growth in EBITDA for the first six months remains modestly ahead of guidance for the year.

However, free cash flow at IMTT was down on 2012 as a result of significant increases in maintenance capital expenditures. These increases reduced free cash flow for the quarter by 35% compared with the second quarter in 2012. IMTT’s maintenance capital expenditures ballooned to $26.9 million in the second quarter of this year from $7.3 million in the second quarter of 2012. We now expect maintenance Capex to be $80 million to $85 million for the full year.

There are four key components of the increase from $60 million that we had provided in our guidance. First, approximately $10 million more from Hurricane Sandy repairs. Second, approximately $5 million more for Bayonne tanks that were being inspected. Third, approximately $2.5 million more for another 500,000 barrel tank in Louisiana that we will now take off-line in 2013 rather than 2014. We have mentioned that this maybe a possibility in our last call.

And fourth, approximately $5 million in 2013 for a required seismic upgrade of a dock in California. As disclosed in our 10-Q, we expect 2014 maintenance Capex to return to the $50 million to $60 million range we saw from 2010 to 2012.

The effects of Hurricane Sandy have been far-reaching for many businesses and individuals here in the north-east. At IMTT beyond the initial destruction caused by the storm there have been the ongoing effects of the corrosive nature of salt water on electrical and other components at the facility that have manifested themselves over time. This has resulted in a project that has become much more of a process than an event.

Additionally, within the process has been spending to upgrade the facilities to better than they were before the storm. In some cases, for good and valuable reasons such as elevating sensitive electrical equipment to keep it out of the way of any future storms. For example, we now have three entirely new electrical substations at IMTT in Brisbane, and will soon have an entirely new water treatment facility on the site.

Some of the incremental capital expenditures have been unavoidable. For example, during the inspection of certain tanks in Bayonne as part of their API recertification, it was likely that IMTT would need to repair or replace the bottoms of some of these tanks. The going in assumption based upon historical experience, was that approximately 25% of the tank bottoms would need repair. However, following examination approximately 70% of the tanks required some amount of work.

Compounding this not only were the repairs made to more tanks, but a previously unutilized coating on the interior of the tanks was used by IMTT to try to prevent future corrosion, an exercise that added to both the cost of the repair and to the length of time that the tanks were out of service.

Some of the increase in 2013 maintenance Capex has been bad luck. Some of it has been opportunistic, including taking advantage of 2013 bonus depreciation for a commercial window. And some of it has been to IMTT management not optimally forecasting and prioritizing projects.

We see potential at IMTT to improve operations through better cost controls, better maintenance planning and better financial planning and analysis. There is potential upside in the performance of IMTT, if we are able to put in place the management processes and systems that we have in place at Atlantic Aviation and Hawaii Gas.

Now that we have Atlantic’s balance sheet in good shape, operations improvement at IMTT will become an area of increased focus. Maintenance Capex issues aside, IMTT is performing at or slightly above our expectations for the year. We reaffirmed our guidance, and continue to expect that IMTT will generate between $260 million and $270 million in EBITDA for the year. We are reaffirming our guidance with respect to the range around pricing moment as well. We continue to expect average storage rates to increase by between 5% and 7% for the year.

There are some sizeable renewals coming up in the back half of the year, and we will endeavor to refine this further over the remainder of the year. And as discussed above, we have revised our guidance with respect to the level of maintenance capital expenditures that are likely to be incurred during the year. We now believe that IMTT will incur between $80 million and $85 million of maintenance capital expenditures in 2013, but we will continue to monitor this. Tax optimization may also play a role in the timing of bringing some projects online.

Moving now to Hawaii Gas. Hawaii Gas had a better quarter than the headline numbers indicate. We saw a dip in revenue at Hawaii Gas in the second quarter compared with the same period in 2012. We can attribute this to two events. First, the results for Hawaii Gas have been somewhat more erratic as a result of the business trying to anticipate the availability of LPG supply in connection with the Tesoro refinery shutdown.

As noted, in the non-utility business volume is generated when we fill the customer tank rather than when the customer uses the gas. Accordingly, with the changes in the supply of LPG, more being imported into Hawaii following the closure of the Tesoro refinery, they have been substantial fluctuations in average customer inventory levels as we prepared for and then adapted to this change in the supply chain.

The timing of large foreign shipments now -- the timing of large foreign shipments matters more than it ever has before because foreign shipments represent a larger volume of Hawaii Gas’ LPG volumes. Essentially there was less refilling of LPG tanks in the second quarter. Without this change in average customer inventory, volumes would have essentially been flat in the second quarter versus the prior comparable period.

This issue has the potential to create some choppiness in Hawaii Gas’ results on an ongoing basis. It could be reflected in both the top line and in working capital depending on the timing and amount of foreign sourced LPG landed in any given quarter. Accordingly, going forward we will outline the headline change in volume and the underlying trend to take this into account. And as I have said for this quarter, the underlying trend was that volume was stable.

The second issue and compounding the headline volume decline caused by average customer inventory was that one large Hawaii resort was off-line for the quarter, while repairs and maintenance were performed on its plant. The customer believes that their equipment will be back up and running later this year. Without these two issues, non-utility volume would actually have been up for the quarter.

Overall the trends underlying the Hawaii Gas business remain favorable. Tourism numbers are strong. Gas continues to enjoy a price advantage in the market, and if it is to attract new customers are yielding good results.

Expenses in the second quarter were negatively impacted by payments related to the appointment of a new CEO at Hawaii Gas in May. While pretty significant in the context of one quarter’s performance, these costs were relatively inconsequential in the context of the growth in the business over the past several years.

Free cash flow decreased 24.5% for the quarter on the lower EBITDA. However, year-to-date the free cash flow generated by Hawaii Gas was down only a little over 1% compared to 2012. As a result, we’re comfortable reaffirming our guidance for Hawaii for the full year of EBITDA in the range between $57 million and $63 million, even taking into consideration the higher costs associated with the appointment of a new CEO.

In terms of operational matters at Hawaii Gas, the big news in the quarter was the announcement of a sale of the Tesoro Refinery on Oahu, to Par Petroleum. Assuming the sale goes through as announced and that remains unclear, there will continue to be two refiners on Oahu and two sources of SNG feedstock and LPG. However, Hawaii Gas is continuing to pursue alternatives with respect to feedstock supply and potentially terminaling arrangements with Tesoro in the event that the sale is not concluded.

For example, in May we reported that Hawaii Gas was working to extend the naphtha feedstock supply agreement in place with Tesoro beyond its scheduled exploration in July. That contract has been extended through September, and both companies are working towards the implementation of an additional extension for a period beyond the end of September.

We expect that to the extent that an agreement is reached, it would then be transferred to Par Petroleum assuming that the sale of the refinery is concluded and will remain with Tesoro if the sale does not proceed.

Trading to date in July at Hawaii Gas has been good, consistent with our outlook for the business and for the remainder of the year. We are reaffirming our guidance of EBITDA in the range of $57 million to $63 million. I would note that this contemplates the unbudgeted severance and related payments made in connection with the appointment of a new CEO to the business in May.

District Energy. At District Energy, the relatively cool weather this year versus last manifests itself in a corresponding reduction in consumption revenue. 2012 was rather warm in Chicago, but 2013 but has been under the historical norms temperature wise. As a result, consumption revenue was down compared with the second quarter in 2012. Offsetting this was an increase in capacity revenue that reflected contractual increases in rates and new customers being added to the system over the course of the prior twelve months.

You may recall that one of District Energy’s customers elected to terminate their arrangements with the business as their contract contemplated. Unfortunately that customer is also trying to walk away from what we believe to be an obligation to pay District Energy the unamortized lease principal payments on certain equipment. We will continue to pursue this. To that end we have agreed to commence mediation on the issue in October.

Aside from the customer issue and assuming continued seasonally normal weather, we are comfortable with our EBITDA guidance for the full year of $20 million, and we expect District Energy to remain a consistent, albeit small component of our overall business. MIC Solar, the investments we made in solar power generation in the fourth quarter of 2012 have performed as expected during the quarter.

We have added to that portion of our business with an investment in a third solar facility in late July. The new facility, located in Tucson, Arizona, is expected to be operational around the end of the year. The three facilities in the portfolio will be capable of generating a combined 43 MW of solar power. In all, we expect the contracted power generation investment will generate about $1 million in incremental cash distributions to MIC this year.

The continued strength of our results means that shares of MIC again generated a total return for the quarter that was in excess of our benchmark. As a result MIC’s manager was entitled to an out performance fee for the second quarter of $24.5 million and elected to reinvest this fee in additional shares. At the current price, the issuance of these shares would increase the manager’s stake in MIC to about 6.5%.

As I have mentioned in the past, settlement of the performance fee and additional shares renders it effectively a non-cash expense. However, the payment does flow through our P&L as a current expense and thus reduce MIC’s taxable income. As such it helps perpetuate our federal income tax shield. We have reviewed our NOL utilization and expect performance of our business over the next few years -- and we have reviewed the expected performance over the next few years, and we continue to foresee having no material current federal income tax liability in consolidation into 2016.

Once again, I will characterize the second quarter and the year-to-date performance of our businesses as operationally solid. The fundamental drivers of continued good performance are intact and our business remains on track relative to our guidance for the full year.

In all, cash generation increased year-on-year by 9.2% in the second quarter, the absolute value of free cash flow improved by over 22% on a year-to-date basis. At $2.17 per share through six months, we are ahead of our full-year guidance. However, with the increased maintenance capital expenditures we foresee coming through IMTT in 2013, we’re leaving our full-year guidance unchanged at $4.10 to $4.20 per share in free cash flow for the year on a proportionally combined basis.

Our focus has shifted from addressing the issues born during the financial crisis, now to driving growth across MIC. To that end our priorities remain. First, driving growth through operational improvements at each of our businesses, especially IMTT. Second, the deployment of our substantial resources on more growth Capex at each of our existing businesses, and third, the continued development of our nascent vertical in contracted power generation.

Growth opportunities aside, MIC and its businesses are performing well at present and we are comfortable reaffirming all of our prior guidance with respect to the full year for 2013.

With that let me ask our operator to open the phone lines for your questions.

Question-and-Answer Session

(Operator instructions) And our first question in queue is from Ian Zaffino of Oppenheimer. Your line is open. Please go ahead.

Ian Zaffino - Oppenheimer & Co.

As far as the share counts that you are looking at for the third and fourth quarters, what exactly are the share account numbers just so we’re kind of clear on in terms of payments on all the shares coming through?

James Hooke

It is a good question. I think the share count that was used for the second quarter was -- for weighted average shares was 50.889021. I think if you look at the total share count for MIC at the moment, the total share count is 52.865943. In terms of the share count for the full year, we haven’t provided a number on that, and the reason for that is the only incremental shares that would be in that would be the shares to settle the performance fee for the second quarter. And the performance fee shares, sorry, the base fee shares that would be paid for the third quarter.

If we give a share count number on that we are effectively giving guidance on what we think the share price is. So we can’t do that. But those are the inputs.

Ian Zaffino - Oppenheimer & Co.

Okay, and then on the IMTT Capex, I know you mentioned it is $0.20 or $0.25, how much of that has been spent already, and how much more is left to go.

James Hooke

I think the year-to-date Capex at IMTT, maintenance Capex at IMTT is 46 million or in that sort of 46, no, I think it is 45,999,000 or something like that. And so that is where we are at the -- you know, if you annualize that annualizes to 90. So a little over half of that has already been spent from our perspective.

Ian Zaffino - Oppenheimer & Co.

Okay, and then just a final question. On the FPOs, which ones are particularly strong or just kind of give us an idea of kind of by market are these sort of the resort destinations that are strong, is it the larger markets that are strong, how to think about that?

James Hooke

I would characterize it as across-the-board strength. I think places like Los Angeles were strong, Teterboro had substantial volumes, Midway had substantial volumes, but some of the resorts did also. So the thing I would say is across the board it was strong. The other thing that I would note in relation to, you know, Atlantic’s performance is we do -- the military is a customer of ours. And the military obviously is, it is not a big customer, but it is not insignificant, the military was down massively on the back of sequestration.

So the result that we achieved, which we thought was a very good result, was sort of despite the effects of sequestration biting. So I would say across-the-board strength on GA offsetting weakness in the military segment, which is less than 5%, but it is, you know, it still matters.

I think the other thing I would say in relation to Atlantic’s performance was you had GA traffic at our airports up by 2%. So the takeoff and landing activity was up by 2%. But the volume of jet fuel sold was actually up by 2.9%. So obviously we are getting better uplift through takeoff and landing, and that is a function of two issues. Firstly it is the market share gain that I spoke about, and secondly that of the aircraft flying we are seeing big metal, as it is called, which is the larger jets, are responsible for more of that traffic growth than the smaller jets.

So we were pleased that 2% increase in flight activity translated it to a 2.9% increase in volume, and then we saw the margin expansion on top of that.

Ian Zaffino - Oppenheimer & Co.

Okay, perfect. Thank you very much.

James Hooke

Thanks Ian.


Thank you. Our next question in queue is from Brendan Maiorana of Wells Fargo. Your line is open.

Brendan Maiorana - Wells Fargo Securities

Thanks. Good morning guys. Hi, James, so, base rates are up since late May, since probably shortly after you guys did your equity offering. Are you seeing any impact on potential acquisition opportunities that are out there. Did they maybe become a little bit more attractive now as you have got some levered buyers, which were willing to pay a pretty high pricing backing of a little bit as they have got their financing cost a little bit higher?

James Hooke

It is a good question Brendan. I think the -- it is probably a little premature for us and the reason I say that is we spent most of the quarter refinancing Atlantic and getting our equity rates away. And then for a couple of weeks we curled up into a small ball after that. And then we -- our focus most on deploying the Capex we have to grow our existing businesses, whether it is more growth Capex at IMTT, more growth Capex in individual FPOs, storage in Hawaii for more contracted power. So we haven’t really been out there looking for M&A opportunities because our focus is sort of on growth in our existing verticals.

Having said that with the dividend that we are paying today, we sort of say, okay, we’re sort of on a 6% dividend yield on a proportionately combined basis, we are levered at 3.3 times, and we are delivering 13% free cash flow growth for the year, or free cash flow per share growth. Based on all those metrics we would have thought that we would hope our cost of capital over time comes down to relative to where it is, and as you have noted, I think everyone else’s cost of capital on the back of that news should probably be going up.

So when it becomes appropriate for us to look at those opportunities, and I think we are not in that space now, but when it does it should help us. We haven’t yet seen higher cost of capital for people plowing through lower prices in the solar space, which is probably the contracted power space. But you know, logically it has got to follow as your question indicates.

Brendan Maiorana - Wells Fargo Securities

Yes. I mean I’m going to get some sort of reading in between your commentary, it is still -- the view is still as we look at the business, you know, we think that we would rather invest in our own business than invest in a new vertical or new acquisition because the return opportunities for outside investment is not as high as it is for the internal investment. I guess, is that how you kind of think about it?

Brendan Maiorana - Wells Fargo Securities

Look I think that is a very good way of putting it. I think there is probably three factors in that drive that. The first is the businesses we are in, we know, so we don’t pay the down tax. The second is the businesses we are in have higher returns, and thirdly, they probably have slightly higher returns because there is an inherent underlying synergy value for want of a better term, in that it is purely incremental with the Capex that we do.

So we are certainly much more focused on growing and expanding in the verticals that we are in.

Brendan Maiorana - Wells Fargo Securities

Great, and then just with the increased Capex at IMTT this year, does that -- just because there is a lot of cash flow in that particular business, does that delay some of the growth that the growth Capex that you may consider in that business if I think about a incremental 20 million of Capex spend on the maintenance side, maybe that gets levered 1.5 times. So does that sort of delay 30 million of growth Capex projects?

James Hooke

Not really, and not directly and the reason for that is probably twofold. One is that business has got a lot of firepower from a balance sheet perspective in terms of undrawn revolver. And it is not aggressively levered today. So it has the balance sheet capacity to fund growth Capex, and secondly as I noted, we have got $100 million of cash at MIC. So to the extent there were further growth Capex opportunities there, we think we could fund some of those.

So I don’t think the maintenance Capex per se delays growth Capex at IMTT. I think it is fair to say that the maintenance Capex does take up management bandwidth, and so there is a sort of issue there, but you know, I think to the extent that the growth Capex opportunities present themselves at IMTT, you know, we would like to pursue them.

Those growth Capex opportunities at IMTT really fall into what I will call two very high-level buckets. The first bucket could loosely be termed rail opportunities. And that is for us to increase our rail off-loading and on-loading capacity at each of our terminals, and charge people a nice rate for using those facilities, and people will sign long-term contracts for the sort of -- for the rail access.

Obviously, that is a very common industry trend at the moment with what happened in Canada at the moment is a sort of watch this space, going on in that space, but that is one I would say is rail opportunities at our terminals. And the second opportunity I would characterize as petrochemical boom on the lower Mississippi. Opportunities especially at our (inaudible) facility to invest in growth Capex opportunities that sort of facilitate the petrochemical industry, and we are looking at opportunities in both of those buckets. And as soon as we sort of contract on one of those we’ll obviously update, but I don’t think there is always balance sheet constraint on IMTT in terms of funding that growth. I think the real constraint is both there is a lead time to agree those projects with people, and secondly there is a management bandwidth issue in terms of the maintenance Capex issues.

Brendan Maiorana - Wells Fargo Securities

Sure. That is helpful and then last one, just in terms of the capacity utilization at IMTT, when do you think that you can get back to that historical utilization range of call it kind of 95% or so?

James Hooke

Yes. Look, I think the answer is in 2014, exactly what month in 2014 it is hard to say. When we take -- and the real issue there would be when we take the second 500,000 barrel tank 503 offline in probably September, August-September the real question will be how long does it take to clean it, and then to repair it and inspect it and then bring it back online. And those processes can take anywhere from under a year to 18 months.

So we will bring 502 back online, and then the real question is exactly what point of the year during the year this 503 will come back online, and then there are some tanks at Bayonne as we mentioned for API inspection. We have got five of those off-line at the moment. When they come back on there is some more to come out. Assuming we get a full year rate on them in 2014, we would expect 2014 to have a higher level of -- a substantially higher level of utilization than 2013 when we get -- and by the end of 2014 we will be, I think back at that right, where that we have historically been at. Exactly which month during 2014 is a bit of a doubt.

Brendan Maiorana - Wells Fargo Securities

Sure. Okay, great. Thanks a lot.


Thank you. (Operator instructions) Our next question in queue is from Alex Knight of Tiger Management. Your line is open.

Alex Knight - Tiger Management

I just have a question about those acquisitions in terms of your solar opportunities, how are you thinking about that for the next couple of years?

James Hooke

Yes, look, I think the first thing I would say is we are very pleased with the two that we have made that are online and running. They are performing at or little bit ahead of what we assumed. The third one, which we announced in July, we expect to be fully operational by the end of the year. So, so far it is going well. We will be opportunistic in the way that we approach this to the extent that we had the ability to deploy sort of $40 million or $50 million of equity in this space that would be growth based on the return profile.

Part of the question then is how long will it take us to do that, and we’re not sure. We would like to see the rate of deployment accelerate, but we don’t want to accelerate it and drop our return profile just for the sake of deploying that equity. So at the moment, we have a funnel, a sort of pipeline of opportunities in deals that are sort of working their way to fruition.

I think as we disclosed, we are very close on a fourth deal. We are sort of in the final stages. Though obviously in the final stages is when you sort of come to the binary go, no go phase. So, you know, I think you are sort of seeing that that pipeline is there and the opportunities are there. But we are not going to try and set some target that we have to hit. If we can get the return profile, we will. If we can’t, we will pursue growth opportunities in other verticals that we are in at the moment.

Alex Knight - Tiger Management

Fantastic. Thank you very much.

James Hooke



Thank you. And with that I am showing no further questions in queue. I like to turn it back to Mr. James Hooke for any further comments.

James Hooke

Thank you very much for your support and your continued confidence in our ability to delivery on our commitment to build shareholder value. Thanks again as always to our lenders who are very important partners of our businesses. There are -- this quarter marked the end of a relationship for a period of time with some of the old Atlantic lenders. And we hope to maintain those relationships and do business with them again soon.

They were wonderful business partners to Atlantic for the past -- from 2007. And we really welcome onboard the new lenders that we have a relationship with Atlantic following the successful refinance there. We look forward to providing you with an update of our results for the third quarter in November, or prior to that as events warrant.

And please as always, feel free to contact us with any questions you may have along the way or suggestions as to opportunities for us or ways that we could run our business better. We appreciate any feedback that you can provide us. Thank you very much.


Thank you. And again, thank you ladies and gentlemen for joining today’s conference. You may now disconnect. Have a great day.

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