James Hooke – Chief Executive Officer
Jay Davis – Managing Director, Investor Relations
Ian Zaffino – Oppenheimer & Co.
Keith LaRose – Bradley, Foster & Sargent
Macquarie Infrastructure Company (MIC) Q4 2013 Earnings Conference Call February 20, 2014 8:00 AM ET
Good day, ladies and gentlemen, and welcome to the Macquarie Infrastructure Q4 2013 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, Ashley, and good morning everyone. Welcome once again to Macquarie Infrastructure Company’s Earnings Conference Call, this covering Q4 and Full-Year 2013. Our call today is being webcast and is open to the media.
In addition to discussing our financial performance on this call 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. 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 appear 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 in 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 that are 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 welcome Macquarie Infrastructure Company’s Chief Executive Officer James Hooke to today’s call.
Thank you, Jay, and thank you as always to those of you on the line for participating in our earnings conference call. There are a significant number of calls taking place this week even at this hour and we appreciate your taking the time to join ours.
For those of you who may have a need to participate in multiple calls this morning, I’ll begin with a summary of our results for Q4 and full year 2013, and follow that with commentary on our guidance for 2014. After that I’ll move on to a more detailed review of our operations for Q4 and full year as well as some specifics on opportunities we see for the year ahead.
Looking first at Q4 and full year results I would characterize them as generally good but not great and the full year as in line with our expectations. On the plus side we saw continued strong performance at Atlantic Aviation driven by an improvement in general aviation flight activity and the excellent management of underlying expenses that resulted in that business performing at the top end of our guidance.
And we enjoyed a good contribution to our proportionally aligned result from our Contracted Power and Energy segment – that is the combination of our solar projects and our district energy operations – with performance improvement being primarily, the full-year effect of the solar facilities acquired in late 2012.
Hawaii Gas had a basically flat year with modest top line growth offset by severance expense and supply disruptions earlier in the year. However, we’re beginning to see signs of progress in our efforts to bring LNG into Hawaii and lower energy costs for our customers.
At IMTT top line growth was solid with storage pricing increasing by 6.4% for the year but management efforts on cost control, maintenance CAPEX and growth CAPEX were all very disappointing. In addition to the continued stable operations of our businesses of course were a considerable number of other initiatives that contributed positively to our results during the year.
The substantial increase in our dividend during the period and the clarity we were able to provide with respect to a target payout ratio were notable. We started the year with an annualized dividend of $2.75 per share and ended it with an annualized dividend of $3.65 per share. Our 2013 dividends represent 82% of 2013 free cash flow per share.
Second, we reduced debt. We simplified our capital structure and obtained an investment-grade rating from Standard & Poor’s. This contributed to keeping our cost of debt at Atlantic Aviation low. Third, reducing the debt at Atlantic Aviation was a contributor to the financial results for the business, and adding six new FBOs positions the business well heading into 2014.
Fourth, we made progress in advancing our LNG strategy in Hawaii. Fifth, we added meaningfully to our portfolio of Contracted Power generation assets, and finally, we made some not insignificant changes to our management services agreement. I believe that in effect we are as close as we can get to an ongoing reinvestment from our management of base and performance fees to which it may be entitled in additional shares of MIC.
The combination of these events, the operating performance of our businesses, and our various initiatives executed during the year contributed to a substantial increase in the amount of cash being produced by MIC. In fact, MIC generated a nominal increase in proportionally combined free cash flow for the year of more than 25%.
The growth rate is lower on a per-share basis of course after giving effect to the additional shares that were issued during the year. Still, on a per share basis proportionally combined free cash flow was higher by 11.7% compared with the underlying figure for 2012 including the impact of issuing $8.8 million shares in 2013.
Again, for those of you who may have multiple calls to attend this morning I’ll now turn to our introduction of guidance for 2014 before taking a deeper look at each of the opportunities in our portfolio.
Our guidance as always has several parts. First, we expect our portfolio to generate proportionally combined free cash flow in a range between $4.35 and $4.50 per share. Our guidance for free cash flow encompasses the reinvestment of base management fees in additional shares but does not project any performance fees or reinvestment of those.
Second, maintenance capital expenditures, particularly those at IMTT, are assumed to normalize relative to 2013. In particular we expect IMTT to incur maintenance capital expenditures of approximately $50 million in 2014. However this reduction in maintenance capital expense is roughly offset by an increase in IMTT’s 2014 tax outlook.
Taxes are an important consideration at IMTT as it is a standalone taxpayer and does not benefit from MIC’s nearly $200 million in NOL carry forwards. Our free cash flow assumption includes the payment of an estimated $44.0 million in cash taxes by IMTT, up from $18.5 million in 2013. The impact of this difference to MIC is over $0.20 per share.
However, there is an upside in our estimate if IMTT can reduce its tax obligations. We certainly believe there are things that can be done in that regard and we’ll discuss more on this later in the call.
Our free cash flow guidance also takes into consideration the increase in cash interest that will be payable at Atlantic Aviation. A portion of the increase stems from the higher debt balance likely to be in place in 2014 versus 2013 having to do with the proposed acquisition of the Florida FBOs. The remainder of the increase reflects the fact that the cost of debt at Atlantic Aviation through the first five months of 2013 was unusually low given the expiration of interest rate hedges in October, 2012.
I grant that the contribution from our Contracted Power facilities is tough to identify, so I’ll simply say that we expect the existing five facilities to contribute approximately $4.6 million to proportionally combined free cash flow in 2014.
Second, we expect that our portfolio will generate EBITDA on a proportionally combined basis of approximately $385 million for the year. Notably, within this portion of our guidance is the potential addition of the now six FBOs by Atlantic Aviation. Collectively these are expected to contribute an incremental $21.3 million of EBITDA on an annualized basis.
Subject to the receipt of the required approvals from the various airports, we currently expect that the acquisitions will close around the end of Q1. The construction of the new hangar at Palm Beach remains on track for completion at around the same time.
Now I’ll point out that one quarter’s worth of free cash flow from the six FBOs is worth about $0.07 per share, so you could argue that all else being equal on a run rate basis, once we have closed all of the Galaxy bases, our run rate is $4.42 to $4.57, not $4.35 to $4.50.
Additionally, the Florida FBOs are more seasonal than the Atlantic Aviation portfolio as a whole with a greater percentage of gross profit generated in Q1. So the actual amount of EBITDA we earn in 2014 will depend to some extent on the timing of the closing of the transaction and the seasonality this year.
Third, again on a proportionally combined basis including 50% of IMTT’s maintenance CAPEX, we expect maintenance capital expenditures to total approximately $45 million for the year.
Before I look at the results of our operating companies in detail let me also comment on our dividends for both 2013 and 2014. As we’ve indicated in our commentary in both Q2 and Q3 last year a portion of our dividend was likely to be characterized as a return of capital, although the precise allocation was not something that could be determined until the end of the year. For those of you who may not have seen your Form 1099 for 2013, the characterization for 2013 was 31% dividends and 69% a return of capital.
Once again, we would expect that a portion of the 2014 dividend will again be characterized as a return of capital and thus not currently taxable, but the precise portion isn’t knowable at this point.
Now as noted in our press release yesterday afternoon, the MIC Board has authorized an increase in our quarterly cash dividend to $0.9125 for Q4, or $3.65 per share annualized. The 4.3% increase comes just six months after our last dividend increase, and maintains our payout within the targeted 80% to 85% of proportionally combined free cash flow. The new increased dividend will be payable on March 6, 2014, to shareholders of record on March 3, 2014.
Again, we believe that our commentary on dividends has been both clear and appropriate. We believe MIC represents a solid total return story underpinned by an above average quarterly cash distribution. Specifically we continue to target a payout of between 80% to 85% of proportionally combined free cash flow generated by our portfolio. Therefore as free cash flow grows so too will our dividends, all else remaining constant.
With that as a high-level overview I’ll move on to a look at each of the components of our portfolio in greater detail. Atlantic Aviation – Atlantic Aviation produced very good top line results in both the Q4 and full year periods. The improvement was driven by the growth in general aviation flight movements overall and the strength of improvements at the airports in which Atlantic operates in particular.
Flight movements at airports at which Atlantic operates increased by 3.8% during 2013, well ahead of the 1.8% increase in the US nationwide flight movements based on FAA data. The increase in flight movements contributed to an increase in the sale of jet fuel, and our management team at Atlantic Aviation was effective at increasing average margins on those higher volumes.
On a same-store basis – and to be clear, that includes everything other than the recently acquired operations in Kansas City – the volume of jet fuel sold across the Atlantic Aviation network grew by 3.3% for the year. Margins on fuel sales moved in a positive direction during the year as well, with increases for the full year of 2.1%. The net of volume and margin improvement on the year was an increase in gross profit of 5.8% compared with 2012. The increase in gross profit includes improvement in non-fuel revenue items as well.
Management at Atlantic Aviation delivered another very good year in terms of expense management. Underlying expenses remained essentially flat for a fifth consecutive year. In effect, that means the inflation driven increases in salaries, utilities, rent, and other items have been offset. The offset has been a combination of expense reductions in other areas and the application of systems and technology that have streamlined the operations.
An increase in SG&A during Q4 resulted in an increase for the full year of 2.4% versus 2012. The increase primarily reflects costs incurred in connection with the acquisitions completed and entered into by Atlantic Aviation during Q4. Incentives were higher in Q4 versus the prior comparable period as well for fairly obvious reasons.
While the proposed acquisitions of the FBOs in Florida and Colorado that we’ve announced will result in higher costs in 2014 compared with the past several years I’m confident the business will manage this impact well.
The net of the improvements in operating results and effective expense management during the year was that Atlantic Aviation generated growth in EBTIDA excluding noncash items of 10.8%. With that level of improvement the business finished right at the high end of our guidance at $144.8 million of EBITDA for the year. That level is essentially the same level of EBITDA as the business’ run rate performance prior to the financial crisis in the summer of 2008.
Importantly, however, the $144.8 million of EBITDA was generated by approximately 15% fewer flight movements across the US versus the peak in 2007. Said differently, flight activity has only recovered from its trough by about half and yet Atlantic Aviation is already generating EBITDA at the same level it was prior to the financial crisis and with marginally fewer FBOs.
Free cash flow generated by Atlantic Aviation grew with the improved performance of the business and the relatively lower cost of the debt for the full year. Interest expense was, not surprisingly, higher in 2013 than it was in 2012. Recall that in Q4 2012 the interest rate hedges in place on Atlantic Aviation debt had already rolled off, and the underlying cost had dropped to about 2% all-in.
For the full year, however, cash interest expense declined to $18.8 million in 2013 from just under $43.0 million in 2012. In 2014 we expect Atlantic Aviation to incur interest expense of about $29.0 million. The increase reflects the full year impact of the business’ refinanced debt facility as well as expansions of that facility in November of last year and an expected increase at the end of Q1 this year related to funding acquisitions.
In all, free cash flow generated by Atlantic grew by 44.1% to just short of $107 million for the year. To put the performance improvement in Atlantic Aviation into perspective, from 2007 to 2012 the business’ EBITDA and free cash flow grew by 1.5% and 3.4% per year respectively. The corresponding numbers for 2013 were EBITDA up by 10.8% and free cash flow up by 44.1%.
Now I mentioned the acquisition of six FBOs a minute ago. Of course I was referring to the acquisition of five FBOs from Galaxy Aviation in the transaction that Atlantic Aviation entered into in December. But I’d also like to comment on the announcement last evening of the acquisition of an FBO in Boca Raton as well.
We’ve been interested in the Boca FBO for some time. Indeed it was the second largest of all the Galaxy locations after Palm Beach, being some 28 minutes’ drive from Palm Beach Airport according to Google Maps and current traffic. It also complements the Palm Beach facility nicely. Unfortunately, we were not able to complete diligence and agree terms to acquire this site in December. Happily, we have done so subsequently and announced this acquisition as part of our results press release last evening.
Our outlook for Atlantic Aviation in 2014 is positive. We believe that along with the continued recovery of the US economy the number of general aviation flight movements in the country will continue to increase. On the priority list of things to do with Atlantic Aviation are the integration of proposed acquisition, continued effective management of fuel margins and expenses, and deployment of capital in additional cash flow enhancing opportunities. In short, we feel very good about Atlantic Aviation at this point.
Oh, and for those of you who may have been wondering about private jet travel to the Super Bowl in New York the only thing worse than the Denver Broncos’ performance in the Super Bowl was the level of general aviation activity in the metro New York City area. As we know, the weather was looking pretty bad heading into the week of the game and that appears to have kept a fair number of people from flying to New York for the event. Don’t get me wrong – we did see an uptick in fuel sales and deicing on Monday after the game but nothing like we’ve seen at other venues in the past.
Super Bowl aside, Atlantic Aviation is off to a strong start in 2014 with very strong fuel and deicing activity though some of this will be partially offset by higher snow removal and utilities expense in Q1 given the extreme weather since the start of the year. All-in-all the start to 2014 has been a good but somewhat unusual operating environment.
Contracted Power and Energy – we’ve combined our solar and district energy businesses into a single segment we refer to as Contracted Power and Energy. Recall that in Q3 our solar operations became a reportable segment. At the same time our district energy business no longer met the definition of a standalone reportable segment. We believe that the combination of these operations into a single segment better reflects the way that we manage and allocate capital to the businesses.
The segment contributed nicely to our results in the quarter and the full year primarily on the strength of the performance of our Contracted Power facilities, our solar investments. All five of the facilities in which we have invested were in operation at year end, although the results reflected essentially the two facilities that were acquired in late 2012.
I would note that there were approximately $3 million in non-capitalized transaction costs associated with these acquisitions that reduced EBITDA and free cash flow in the year of acquisition. However, the performance of our solar investments is exactly in line with our expectations.
The financial performance of district energy was consistent with our expectations for both the quarter and the full year. On a standalone basis, district energy’s EBITDA was just ahead of our 2013 guidance.
I don’t usually spend too much time talking about the balance sheets of our portfolio businesses but I do want to point out one thing in connection with our investment in Contracted Power. As the managing member in the flip partnership structures for these facilities we consolidate 100% of the debt of these investments onto our balance sheets. However, our economic interest in the partnerships varies so including all of the debt in the calculation of proportionally combined leverage would penalize us.
Rather than introducing quarterly volatility into those calculations based on the varying ownership interests over time we have excluded the debt of the Contracted Power business from our proportionally combined leverage ratio analysis. To be fair we’ve also excluded holding company cash from the calculation and at the moment the two largely offset one another.
We continue to evaluate opportunities to invest in the Contracted Power subsector. We are finding the opportunities in solar to be the most promising and believe that we will be able to deploy additional capital in projects like those we have already completed, and to do so at comparable rates of return.
Again, I can see us deploying an additional $35 million to $50 million over the next twelve to 18 months in stable, relatively low-risk projects that generate RIRs of around 12%. It’s not an enormous amount of money, but at that point we could have a portfolio of contracted power assets generating about the same amount of free cash flow annually as Hawaii Gas does today.
IMTT – IMTT generated modest top line growth in Q4, although large increases in terminal operating expenses produced a poor result from both an EBITDA and free cash flow perspective for the period. On the other hand, the relatively better performance of the business during the first three quarters of the year meant that the full-year result was okay.
Now some of you may be looking at the increase in EBITDA excluding noncash items for the full year and thinking I’m being a bit harsh. EBITDA as reported is up 15.9% and at the high end of our guidance at $268.5 million. That much is true. But the reported figure also includes a change in methodology with respect to the treatment of certain pension items.
IMTT had historically reduced EBITDA by their noncash GAAP pension expense and reduced free cash flow by the cash contribution to the pension in addition. In our view and consistent with the approach we’ve taken at all of our other businesses, the noncash pension expense is clearly something that should be added back to EBITDA. The cash contribution is a use of cash and appropriately reduces free cash flow.
In this case, the addition of the noncash pension expense to EBITDA increases that figure by about $11 million for the year. So on an apples-to-apples basis with how this was being treated in the past, EBITDA excluding noncash items was up by only 10.4% for the year.
The $11 million noncash item increased both EBITDA and free cash flow; however, free cash flow was partially offset by a $4.5 million cash contribution to the pension. The $4.5 million contribution was by the way to a plan that already exceeds 100% of the minimum required funding.
Pension aside, let’s look at what’s going on at IMTT operationally during Q4 and full year periods starting with the top line. Terminal revenue grew by 4.4% in the quarter and by 7.6% for the year. Terminal revenue for the quarter included an effective increase in average storage rates of 4.4%.
However, as we reported in Q3 there was a change in the number of a small number of customer contracts where [take-or-pay] long-term infrastructure access payments were decoupled from storage contracts. Had these services been included in storage rates for Q4 as they had been historically, average storage rates would have increased by 4.4% rather than the nominal 2.8%.
Similarly had those payments been included for the calculation of storage rates for the full year, rates would have increased by 6.4%. The 6.4% would be compared with our expectation that rates would be up by between 5.0% and 7.0% for the year. So the top line at IMTT was consistent with our expectations.
Capacity utilization at IMTT was also in line with our expectations. At 92.7% at year-end it was down slightly from the 94.1% at the end of 2012, reflecting the timing and increased size of tanks taken offline for cleaning and inspection in 2013. At this point we expect utilization to remain below historical normal levels of approximately 95% through 2014 as the cleaning and inspection of the remaining large tanks is undertaken.
As I’ve said before, pure storage rate movement with or without a discussion of capacity utilization is becoming less and less meaningful in terms of providing insight into the performance and prospects of IMTT. This is especially true where the combination of contracted storage rates and contracted long-term infrastructure access payments together account for around 84% of terminal revenue.
Going forward we will discuss terminal revenue in the context of these firm commitments as others in the industry do rather than discussing rates and utilization in isolation. In that vein, at the end of 2013 the revenue weighted average remaining contract life of IMTT’s remaining contracts was 3.1 years. This implies an average firm commitments contract length of over 6.0 years.
I’ll leave OMI Environmental Response Services to the side except to note that the contribution from this business to IMTT’s overall results was well below historic norms – good for the environment perhaps but not so good for IMTT. Normally it contributes approximately $3 million to IMTT’s EBITDA. This year it reduced IMTT’s EBITDA by approximately $1 million.
However, the 2013 IMTT story, especially in Q4 was not a revenue story but a cost story. In 2013 IMTT revenue grew by 8.3%. That is an improvement over 2012 where the revenue grew by 6.1%. So from a top line perspective, IMTT’s growth in 2013 was about a third better than 2012. However, operating costs grew by 6.1% or $13 million in 2013 while they only grew by 1.1% or $2 million in 2012, notwithstanding Sandy.
Of the year-on-year cost growth, approximately 50% came in Q4. Had 2013 costs grown at the same rate as costs growth in 2012, EBITDA would have been $11 million higher. Had 2013 costs grown at say inflation, say 3%, EBITDA would have been $7 million higher. The bad news here is the level of spending. The silver lining is that this is a massive opportunity for improvement.
The real issue in the quarter was the increase in terminal operating expenses, and the increase was against what should have been a soft comp for Q4 2012 in which Hurricane Sandy drove expenses up. Terminal operating expenses increased by 10.2% in Q4 2013 primarily on reported increases in labor and repairs and maintenance. A portion of the labor cost increase was attributed to uninsured health claims of $1.7 million. For the full year IMTT reported an increase in terminal operating expenses of 4.6%, almost $9 million and well above the rate of inflation over that period.
We had indicated as far back as Q2 last year that we thought IMTT’s maintenance capital expenditures would be higher than originally forecast, primarily as a result of repairs to the Bayonne facility stemming from Hurricane Sandy. We said at that point that we expected maintenance capital expenditures to be in the range of $80 million to $85 million for the year. The reported number was $83.2 million.
If we expect to look at IMTT’s ordinary maintenance capital expenditures excluding what we believe to be the portion attributable to Hurricane Sandy we still see some substantial numbers. The fact is that IMTT and its management team continue to spend far more on maintenance CAPEX on the business than others in the industry, which really concerns me.
To put this into context, in 2013 Kinder Morgan spent about 7% of its EBITDA on maintenance CAPEX. Plains All American spent 8.5%; Buckeye spent 11.5%; Oil Tanking spent 2.6%; and Magellan Midstream spent 9.1%. The industry average here is about 7.7%. In 2013, however, IMTT spent 31.0%, more than four times the industry average. Even excluding the impact of Sandy recovery, IMTT still spent 25% of its EBITDA on maintenance CAPEX in 2013, still more than 3.5 times the industry average.
Again, the bad news here is the level of spending. While benchmarking can be a somewhat blunt tool, the order of magnitude of the difference here demonstrates a silver lining in the form of considerable scope for improvement. Due to the lack of cost controls, the inability of management team to budget maintenance capital expenditures, and the lack of reliable financial planning and analysis capability at IMTT among other issues, we intend to be more aggressive in our push to enhance or upgrade the IMTT Senior Executive Management Team. We will take all actions we deem necessary.
As expected, IMTT generated a slightly larger cash tax liability in 2013 than it did in 2012. Federal cash taxes increased to $13.8 million from $13.5 million, and cash state taxes increased to $4.7 million from $4.6 million. As has been the case historically, continued investment in fixed assets with relatively short depreciable [lines] for tax purposes and the availability of bonus depreciation over the past couple of years has provided IMTT with a significant tax shield.
Although the business deployed a considerable sum in maintenance capital expenditures during last year, its investments in growth CAPEX projects slowed from $107.1 million in 2012 to $50.3 million in 2013. In part as a result of the lower depreciation expense we are projecting a substantial increase in cash taxes, federal cash taxes payable by IMTT in 2014 all else being equal.
Without contemplating investment beyond the normal level of maintenance and growth projects currently underway we would expect IMTT to incur cash taxes of approximately $44 million in 2014.
The increase in the IMTT tax estimate from $18.5 million in 2013 to $44.0 million in 2014 has come about for two reasons. First, from 2010 to 2013 IMTT benefited from bonus depreciation on CAPEX poured into service during those years. As we speak Congress has not extended bonus depreciation into 2014. While we hope that it does, hope is not a strategy.
Second, compounding the absence of bonus depreciation is the fact that IMTT’s growth CAPEX pipeline has declined. We have always said that IMTT can shield itself from tax liability through prudent growth CAPEX. What we see in the 2014 outlook is what happens without such growth CAPEX – this in part is why we were commenting through 2013 about how disappointed we were with IMTT management’s failure to secure new growth CAPEX projects.
As I mentioned in my summary remarks we also believe there are good and reasonable means by which IMTT can reduce its 2014 tax liability. The most obvious is the deployment of additional growth capital. However, the further into the year we get without contracting and commencing such projects the less likely they are to be brought into service in 2014 and to generate depreciation in the year.
As I will discuss shortly there are a large number of growth projects on the lower Mississippi that IMTT should be able to take advantage of. There’s also the possibility that IMTT could invest tax equity in projects like our Contracted Power facilities – in effect step into the role currently filled by Chevron Energy Solutions where MIC provided the sponsor equity but IMTT provided the tax equity instead of Chevron. This may be a stopgap solution for 2014 while IIMTT seeks to replenish its more traditional growth CAPEX pipeline.
By way of example, a single solar project of the size that MIC has traditionally invested in should be sufficient to provide IMTT with a meaningful tax shield in 2014. IMTT would benefit from both the investment tax credit and the accelerated depreciation. In any case we’ve been conservative in our guidance on this particular point and have assumed that IMTT’s cash taxes increase in 2014.
While both IMTT shareholders are aligned in their interest to see IMTT taxes reduced IMTT management are still coming up the learning curve on tax equity as it is new to them. Longer-term structural changes like MLP or REIT conversion have been mentioned for IMTT. While many of these are interesting and worthy of further study they would not address the 2014 tax issue and they should not be necessary for several years, until IMTT goes ex-growth. Given the availability of midstream energy growth CAPEX projects in the markets in which IMTT operates, IMTT should not be in a position where it is at ex-growth.
The management of IMTT continues to evaluate growth capital expenditure opportunities that we expect they will bring forward to the IMTT Board for review and hopefully approval. As noted on our filing on Form 10(k) IMTT has projects with a combined value of more than $100 million currently under review. As is our practice, when these opportunities have advanced to the point of a signed contract we will publicize the fact.
Looking a bit deeper into IMTT’s growth capital expenditures we see that while 2013 industry average was to spend approximately 59% of its EBITDA on growth CAPEX, in 2013 IMTT spent about 20% of EBTIDA on growth CAPEX. In contrast, from 2006 to 2012 IMTT spent about 71% of its EBITDA on growth CAPEX. There is a massive opportunity for improvement if IMTT can get back to its historical growth CAPEX deployment levels, especially given the historically attractive rates of return IMTT has achieved on growth CAPEX projects.
Let me describe for you some of the areas of opportunity for IMTT to deploy meaningful amounts of growth CAPEX in the next few years. The largest opportunity will be in the lower Mississippi region, especially in IMTT’s facility at Geismar, which is at mile marker 184 on the Mississippi and has a water draft of 39 ft.
The current trend of repatriation of chemical grants from Latin America and elsewhere and the renaissance of US manufacturing due to the shale revolution are seeing an unprecedented number of projects being announced in that region. IHS, the global information company, estimates that by 2025 as much as $100 billion will have been invested in new chemical, plastics, and related derivative manufacturing facilities according to their report “America’s New Energy Future Volume 3.”
IMTT’s facility at Geismar is well-positioned to benefit from such investments, especially given its proximity to chemical manufacturing facilities owned by Shell Chemical, BASF, Westlake Chemical, Occidental, Huntsman, and others in the region. We remain optimistic that IMTT will bring economically sensible opportunities for investment in this area to the table for consideration. As noted earlier, IMTT has projects with a combined value of more than $100 million currently under review.
IMTT’s financial performance so far in 2014 has been good. Terminal revenue is up year-on-year on strong heating revenue in particular, and expenses are more or less in line with where we thought they should be. January performance at IMTT was very strong.
Hawaii Gas: a modest increase in the sales at Hawaii Gas was offset by higher costs of goods sold and higher production costs. As a result EBITDA was flat for the quarter and down slightly versus the prior full year. Higher taxes contributed to a reduction in free cash flow in both periods.
Financial results for Q4 at Hawaii Gas include an increase in gas sales of 2% overall. On the unregulated side an increase in revenue of more than 12% was partially offset by an increase in the cost of goods sold related to the higher price of LPG. Hawaii Gas was slow to pass these increases in LPG prices through to customers, creating a bit of a time lag in its results.
For the full year sales of gas were up less than 1% in total and costs, other than costs of goods sold, rose at a faster rate. The increased costs, primarily labor costs in production and severance costs relating to changes in executive management that were made in 2013, produced a 2.3% decline in EBITDA for the full year compared with 2012.
As we noted in the middle of 2013 the disruption in supply by the on-again/off-again sale of the Tesoro refinery was clearly a negative for the business during the year. The largest negative has to do with the fact that Hawaii Gas was forced to purchase more LPG from foreign sources in 2013 than had historically been the case. Hawaii Gas purchased more than three-quarters of its LPG from off-island sources in 2013 versus about 50% in each of the several prior years. Having to do so and on short notice meant that Hawaii Gas did not achieve pricing that was as good as it had in the past either.
But we believe that these issues have been resolved to a large extent by the purchase of the Tesoro refinery by affiliates of Power Petroleum. The refinery is producing both [nap] for feedstock for Hawaii Gas’ unregulated SNG operations and a portion of the LPG it distributes through the unregulated business. Contracts related to these supplies run through 30 June 2014, and management at Hawaii Gas is now focused on securing either an extension of these or new contracts on terms that provide the continued surety of supply for Hawaii Gas and its customers.
Flattish operating results aside, free cash flow at Hawaii Gas declined primarily as a result of an increase in taxes in both the quarter and the full-year periods partially offset by a decrease in maintenance capital expenditures. The federal component of Hawaii Gas’ tax liability will of course be offset in consolidation with the application of MIC-level NOLs.
Looking ahead, we expect that with the stabilization of the feedstock LPG supply situation in Hawaii that the business will again produce a growing amount of free cash flow and EBITDA from core operations in 2014. Consistent with that, the performance of the business through the first few weeks of the year has been good.
A price increase has been implemented by the unregulated operations and the outlook for the Hawaiian economy is good. Tourist visits to the Islands from the US mainland are expected to increase at rates roughly comparable to 2013 while visits from Asia generally and Japan in particular are forecast to increase relative to 2013. Unemployment remains well below the national average and is expected to be approximately 4.2% in 2014.
When last we spoke in November, the MIC Board was headed to Hawaii for planning meetings and discussions with local officials regarding our proposed LNG initiatives. Some changes in personnel at the Hawaii Public Utilities Commission have slowed the approval process although we remain prepared to commence shipping of LNG to Hawaii as soon as we receive the requisite approvals.
We are in negotiations with suppliers and customers for LNG as we speak – well not literally as we speak because it’s currently 3:00 AM in Hawaii – but assuming our plans in Hawaii come to full fruition we could deploy $300 million to $400 million of growth CAPEX in the next five years in Hawaii to more than double the size of our business. Remember that we doubled the EBITDA of the business between our acquisitions in 2006 and 2012. Even without LGN we expect Hawaii Gas to continue to grow as it takes share from electricity and diesel in the Hawaiian energy market.
In short, we think the results for Hawaii Gas in 2013 were something of an anomaly relating primarily to a disruption in the feedstock supply landscape. The disruptions are largely behind the business now and will be reduced even further with the approval of our first phase of our LNG strategy.
On the demand side, 2014 has started strongly. Hawaiian tourism is probably benefiting from everyone trying to escape the cold winter in the mainland. As propane commodity costs have spiked with the cold snap we put through a price increase in early February to address this.
Corporate – since our corporate segment no longer includes operating entity data as it did in the first half of 2023, in addition to the base and performance fees incurred you can see clearly the holding company-level SG&A expenses for the year as well. For 2013 that number was $6.1 million, consistent with our expectation.
SG&A was lower than in 2012 as a result of us not incurring legal fees in relation to the arbitration with our co-investor in IMTT last year. You will also see the offsetting consolidated taxes associated with the application of our NOL carry forwards to the federal cash liability generated by the combination of Atlantic Aviation and Hawaii Gas.
So in summary, before I open the lines to your questions I did want to spend a moment discussing our approach to guidance going forward and touch on the subject of growth and growth initiatives we could make in the future. As some of you will have seen we are clearly taking a portfolio view when it comes to guidance in 2014. Where we have provided business-by-business guidance on EBITDA in the past we are now focusing in the proportionally combined measures – proportionally combined free cash flow as we always have, proportionally combined EBITDA, and proportionally combine CAPEX measures.
To be clear we’re doing this in response to feedback from our investors on the subject. Now in fairness I have spoken with investors who were vehemently opposed to any change in our methodology and to investors who were equally adamant that we change our focus in favor of attracting a broader cross section of investors. We concluded that inasmuch as we believe that MIC represents an attractive total return opportunity and should be evaluated on that basis, by focusing on a portfolio level measure we are making our story more approachable and increasing its appeal.
You will recall that this is the approach that we followed in the Q3 2013 earnings release. In our press release in November we noted that the portfolio was on track to produce proportionally combined EBITDA of approximately $337 million for the year. We did not discuss the prospects of any of our operating companies in that context. As it turned out, proportionally combined EBITDA for the full year was over $339 million.
There are longer-term benefits to this change as well. For example, we’re looking increasingly at extracting cost savings across our businesses. We see opportunities for closer integration of our Contracted Power operations and Hawaii Gas. When we have achieved these and other savings the question then becomes one of apportioning the benefits. However, we eliminate the issue by focusing on proportionally combined measures. I’m confident that this will be an effective way of presenting our story going forward.
As we have said through 2013 the drivers of growth in our business, typically price and volume, have been undergoing a change. Pricing power has been moderating for some of our businesses, particularly IMTT and Hawaii Gas, while clearly accelerating at Atlantic Aviation. Given our right-sized balance sheet and available undrawn debt capacity we could look at good opportunities to deploy capital in growth projects with the potential to accelerate MIC’s cash generating capacity.
In 2013 our businesses invested an aggregate $58.6 million proportionally combined in growth projects. On top of that is another more than $23.0 million deployed in acquisitions in Contracted Power and Atlantic during the year.
Looking to 2014, our businesses are committed to an additional roughly $92 million worth of growth capital expenditures on a proportionally combined basis. Obviously that figure doesn’t include the potential $300 million investment that would have to be made in the LNG facility in Hawaii or some of the more substantial projects that have been discussed at IMTT; nor does it include acquisitions of additional Contracted Power facilities or FBOs at Atlantic Aviation.
What it says is that we see the potential to grow MIC free cash flow per share at rates consistent with those that we and our investors have enjoyed over the past several years where we can continue to find sound investment opportunities. And importantly we have the capacity to undertake these initiatives without stressing our financial position. At year-end our leverage across the entirety of MIC was 3.5x excluding MIC solar and the corporate segments I mentioned a few minutes ago.
Once again, I would characterize the Q4 performance of our business as good and the full year as consistent with our expectations. We grew proportionally combined free cash flow significantly during 2013, and as is our practice, returned the substantial majority of this growth to our shareholders in the form of an increased dividend. And we successfully executed on important initiatives that position the company well relative to delivering continued good growth in 2014.
With that let me ask the Operator to open the phone lines for your questions.
Thank you. (Operator instructions.) Our first question comes from Ian Zaffino of Oppenheimer. Your line is open.
Ian Zaffino – Oppenheimer & Co.
Hi, thank you very much. I know you guys said that you’re going to keep the dividend sort of in line with cash flow as it grows, I forget the exact wording but similar to that effect. Does that mean we’re going to start to see, how are you thinking about that as far as when we’re going to start to see regular dividend increases and how can we as investors look at where the dividend might go versus free cash flow? Thanks.
Sure, Ian, thanks for the question. I think in relation to dividends what we’ve said is that essentially, all else being equal as free cash grows the dividend will grow. Now I note that the last two increase, the increase in the middle of 2013 and the next increase that we just did, were probably larger but less frequent than some in the LNP and utility space have done.
We’ve heard feedback from shareholders that all else being equal they would probably prefer more frequent, less sizable increases, and so we will take that onboard when we say as free cash flow grows and we weigh up the macro environment and all else being equal, we’ll take that on notice.
But I think you would sort of say up until sort of probably now, having finalized sort of the capital structure everywhere, we’ve been in a stage where there have been sort of step function increases and we’re more in what I would call a sort of steady state growth situation now. So we’ll revise the dividend review policy as appropriate as we move forward.
Ian Zaffino – Oppenheimer & Co.
Not to push this further but your free cash flow is growing throughout the year, so does that mean the dividend is going to grow throughout the year?
To the extent free cash flow grows, all else being equal the dividend should grow.
Ian Zaffino – Oppenheimer & Co.
Okay. Second question would be on Atlantic, I know you talked about the Super Bowl and then some incremental snow removal costs. What have you see as far as just your volumes, takeoffs and landings, given the weather?
I would say that January is the only month for which we’ve got sort of full results, and by and large I would say January was a continuation of the good momentum we saw during Q3 and Q2. So January got off to a great start. February to be honest has been weirder because the weather has been spotty. In some markets we’re picking up massive amounts of business because as commercial flights get cancelled people have to shift to GA if they’re traveling. In other markets we’ve seen a drop off in the sort of flight activity as people clearly don’t want to fly into somewhere that’s got a hideous climate unless they have to.
But overall I would say that notwithstanding the snow removal to clear ramp is going to be up and utilities are going to be up because gas prices are up, we’re still expecting Q1 2014 as it started to be well up on the prior comparable period. And remember, in the prior comparable period the Super Bowl was in New Orleans where we have a facility and we had a boom. I’d say we had a bust on the Super Bowl this time, and notwithstanding that we’ve sort of seen to-date double-digit EBITDA growth in 2014.
Ian Zaffino – Oppenheimer & Co.
Okay, and then the last question would be, and this might be just a naïve question but you look at the spending ratios at IMTT vis-à-vis the competitors – what are they spending on? Can you just give us a better idea? How easy is that to sort of lop off and what needs to be done there?
Okay, so let me go into this. There’s a couple of buckets here. The first is as we note in our 10(k) we have disagreements with our co-investor as to the definition of what’s maintenance, what’s growth CAPEX. And by way of example, at Bayonne after the repairs to the facility there following Sandy, all of the money spent on those things at Bayonne was classified as maintenance CAPEX – notwithstanding that some of what was built there was new, better than new, better than what has previously been classified. It was all classified as maintenance CAPEX. So unlike our other businesses there’s sort of a categorization issue where I don’t think they have a framework for doing it.
Secondly, unlike our other businesses they run far less of a proactive maintenance CAPEX schedule across all of their locations, and what we found at our other businesses is that when you proactively manage maintenance CAPEX you can often do multiple tasks simultaneously and control the costs better. And when I benchmark that with other midstream energy players and talk to industry players that’s exactly what others do, and IMTT doesn’t do that.
Thirdly, I think that there [aren’t] processes in place to sort of control and push back on that, and the governance processes around CAPEX are weak to say the least. We brought an audit firm in this year to conduct a review of that. That review is ongoing. It’s found substantial weaknesses and we intend to tighten those. But as you said any benchmarking of performance of IMTT relative to any of those peers shows that one of these terminal businesses is not like the others, and we would prefer our terminal businesses to be more like the others when it comes to maintenance CAPEX.
Ian Zaffino – Oppenheimer & Co.
Okay, great. Thank you very much.
Thank you. Our next question comes from Keith LaRose of Bradley, Foster & Sargent. Your line is open.
Keith LaRose – Bradley, Foster & Sargent
Hi, good morning gentlemen. You actually answered my questions just a minute ago on IMTT on the CAPEX question, thank you.
And I’m not showing any other questions in queue. I’d like to turn the call back over to management for any further remarks.
Well, I want to say thank you for your support and your continued confidence in our ability to deliver on our commitments to building shareholder value for you. I want to thank all of our staff and management teams, our suppliers, especially our lenders across our portfolio companies.
We look forward to providing you with an update on our results for Q1 of this year in just ten weeks, and as always please feel free to contact us with any questions you have along the way. And finally, in closing I would like to wish a happy birthday to Lou Pepper, the CEO of our portfolio company at Atlantic Aviation. Thank you and good morning.
Ladies and gentlemen, thanks for participating in today’s conference. This concludes today’s program. You may all disconnect; everyone have a great day.
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