Macquarie Infrastructure Company Trust (NYSE:MIC)
Q2 2012 Earnings Call
August 02, 2012 08:00 a.m. ET
Jay A. Davis - Investor Relations
James Hooke - Chief Executive Officer
Todd Weintraub - Chief Financial Officer
Ian Zaffino – Oppenheimer & Co
Brendan Maiorana – Wells Fargo Securities
Good day ladies and gentlemen and welcome to the Macquarie Infrastructure Company second quarter 2012 earnings 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.
Jay A. Davis
Thank you J.J. and good morning everyone. Welcome once again to Macquarie Infrastructure Company’s earnings conference call, this one covering the second quarter of 2012. Our call today is being webcast and is open to the media. In addition to discussing our quarterly financial performance eon this call, we have published a press release summarizing our results and file the financial report on Form 10-Q with the Securities and Exchange Commission. These materials were released last evening and may be downloaded from our website, www.macquarie.com/mic.
To help illustrate some of the key points in our results we have again produced supplemental materials that will be referenced during the call. The materials are also available on our website. A link to the materials is located under the Events portion of the home page. If you have not already done so, I would encourage you to download these items.
Before turning to 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 it’s not a solicitation of an offer to buy or sell any security or instrument.
This presentation contains forward-looking statements. We may, in some cases, use words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this presentation are subject to a number of risks and uncertainties. A description of known risks that could cause our actual results to differ appears under the caption “Risk Factors” in our Form 10-K.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware could also cause our actual results to differ. These forward-looking events discussed in this presentation may not occur. These forward-looking statements are made as of the date of this presentation and we undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation whether as a result of new information, future events, or otherwise, except as required by law.
With that, it is my pleasure to introduce Macquarie Infrastructure Company’s Chief Executive Officer, James Hooke.
Thank you, Jack. Good morning to everyone and thank you all for participating in our earnings conference call this morning. I’ll focus on two key areas in my prepared remarks this morning. These are, firstly, our announced dividend increase and the prospects of additional increases in the future. Secondly, an update on the continued good performance of our businesses throughout the first half of 2012 and our updated guidance for the full year.
As always, we’ll answer any questions you might have about MIC following my prepared remarks. First things first however. For those of you with limited time and multiple earnings calls this morning I’ll begin with a very short summary of our results for the quarter. Once again each of our four businesses delivered financial performance during the quarter that was consistently better than our expectations. The gas company generated strong growth in contribution margin on a 5.4% increase in volume of total debt sold including a 10% growth in the non-utility volume and continued strength in non-utility margins.
Free cash flow increased by more than 37% even with a larger tax provision stemming from the improved results. The gas company’s federal income tax liability will of course be absorbed by MIC’s federal NOL in consolidation. With a strong first half in the books, we are looking for the gas company to exceed our prior guidance for EBITDA for the full year and generate between $55 million and $57.5 million of EBITDA for the full year 2012.
IMTT’s results reflected continued growth in terminal revenue and gross profit and a softer quarter for the Oil Mop environmental services business. Expenses were lower than the second quarter of last year on lower fuel costs, and without the unusual healthcare costs and unusual repair and maintenance costs incurred in 2011. In addition, we recalculated IMTT’s tax provision for the first and second quarters in accordance with GAAP. In doing so, we reduced IMTT’s provision for the first quarter and now provide for a federal income tax liability of $12 million and a state income tax liability of $5.2 million for 2012.
IMTT’s actual federal income tax liability could be higher or lower, depending on whether or not sufficient capital assets are placed in service during the year to provide IMTT with a tax shield from the resulting bonus depreciation.
Free cash flow at IMTT increased to $37.1 million from $26.9 million in the second quarter of last year. We’ve updated our EBITDA guidance for 2012 at IMTT, and increased the expected range of results from between $220 million to $235 million to narrow our expected range of results is to between $230 million and $240 million.
District Energy continued to deliver strong operating results based on the above-average temperatures and the increased demand for cooling in Chicago in 2012 compared with 2011. Free cash flow decreased by less than $300,000 for the quarter on the timing of the payment of taxes this year compared with last year, but year-to-date it’s still up 13.4% on the first half of 2011. Not surprisingly, District Energy is on target to deliver EBITDA that was previously estimated at around $22 million for the year.
Atlantic Aviation’s locations enjoyed increased general aviation traffic year-on-year. On a same-store basis the volume of GA fuel sold was up 1.5%, and average margins were 2.8%. The business generated $15 million in distributable cash, half of which were paid to MIC and half to its lenders to pay down debt. Including this debt pay down scheduled for August 10, Atlantic’s leverage will be reduced to 5.64 times net debt-to-EBITDA. With the slightly soft air traffic figures, we’ve tightened the range of EBITDA we expect from Atlantic in 2012 to between $130 million and $135 million.
We reported $0.93 per share in proportionally combined free cash flow for the quarter compared with $0.75 per share in 2011. This is a 24% increase. Year-to-date, our businesses have generated $1.88 per share in proportionally combined free cash flow versus $1.55 per share in the first half of 2011.
Two important items follow from this increase in free cash flow. First, the MIC board has authorized an increase in our quarterly cash dividend of 213%, from $0.20 per share in each of the past five quarters to $0.625 per share per quarter or $2.50 per share annualized commencing this quarter. The second quarter dividend will be payable on August 16th to shareholders of record on August 13th.
Second, we’re comfortable increasing our guidance for proportionally combined free cash flow to approximately $3.70 share from the $3.50 to $3.60 per share range provided previously. At $3.70 per share the year-over-year increase on our proportionally combined free cash flow would be just over 17%.
Overall, I’d characterize the second quarter as a continuation of what looks at this point to be a strong year. For those of you with a bit more time, I’ll progress with our agenda and turn to an update with commentary on our announced dividend increase. So let’s look at the dividend update.
Clearly, we are pleased that the MIC board has authorized an increase in our quarterly cash dividend, in authorizing the dividend for the second quarter of $0.625 per share. The MIC board considered four factors among starters. First, the cash generating capacity of our businesses, second, the availability of cash today, third, the prospects for unlocking cash flows from certain of our businesses in the future, and finally, it’s designed to recognize the patience of shareholders and the patience they’ve shown as we have executed on our capital management initiatives.
Cash reserves at present totaled $131.7 million, including principally the $110.6 million in cash we received last month from IMTT. IMTT will also be paying another $9.3 million to MIC next week, taking our total cash balance to over $140 million. In all, the board members were satisfied that the payment of $2.50 per share annually was both a suitable and a sustainable figure.
In addition to a current cash balance of over $140 million, we expect to continue to receive distributions from each of the gas company and to some extent from Atlantic Aviation. At present, the gas company is generating approximately $0.76 per share in free cash flow. In fact it was $0.72 per share on a trailing 12 month basis and also coincidentally, if you just annualize the business of second quarter results, it was also $0.72 per share in free cash flow.
Even if Atlantic’s operating results flattened at today’s levels, and we don’t believe they will and in fact in July they have not, we would expect that business to generate a distributable free cash flow of between $1.70 and $1.80 per share after its refinancing. Clearly these two businesses alone could support a dividend of $2.50 per share.
District energy will not be a factor until its debts being refinanced sometime prior to its maturity in 2014. Given that the excess cash generated by that business will be used to reduce debt principal until then. Simply put, MIC has sufficient cash flows from its businesses and available cash resources with which to sustain a $2.50 dividend per share on an annual basis.
However, and importantly, there is upside in the dividend story. The upside in our ability to distribute cash comes from three sources. First, the continued growth in cash generation by our businesses. For example, we assume that we will continue to experience a positive trend in gas consumption in Hawaii and jet fuel volumes over the medium term at Atlantic Aviation. Thus, with stable capital structures in place and effective management of operating expenses and cash capital expenditures, we would expect to see growing cash distributions to MIC from each of our businesses.
Second, although small, District energy can be an important contributor to the distributable free cash flow when it’s being refinanced. At present, we foresee refinancing this business in 2013 or 2014. When District energy is distributing cash, it will cover the normal annual expenses incurred by the MIC holding company.
Third, and clearly the most important and significant, as we receive periodic distributions from IMTT, the opportunity for a step function increase in our quarterly cash dividend emerges. Based on IMTT’s forecast of 2012 EBITDA, the business is capable of generating approximately $1.40 of free cash flow per share on our 50% interest alone. All of this ties together when you think about our guidance for the full year.
We now expect that our businesses will generate proportionally combined free cash flow of approximately $3.70 per share. With continued growth of the business at today’s rate, not some hockey stick growth assumption, proportionally combined free cash flow could hopefully be above $4 per share relatively soon.
As of this quarter, we are trying out $2.50 per share in dividends with the potential to payout for substantial majority of an additional $1.50 as we receive the payments to which we are entitled from IMTT and where Atlantic Aviation and District Energy are refinanced. I’d note that the $2.50 per share dividend reflects approximately two-thirds of our estimated 2012 proportionally combined free cash flow. However, this is just a product, not a targeted payout ratio, two-thirds is an output, not an input. In short, MIC should continue to be an attractive growth and income story.
Let’s move to a more detailed operating company update. I’ll continue the second portion of my prepared remarks and commentary on our individual operating companies including updating you on the guidance. Let’s look first at the gas company. Total contribution margin increased by more than 18% on improved sales overall and on margin improvement in the non-utility portion of the business.
Free cash flow was up by more than 37% to $8.6 million for the quarter. Once again the non-utility portion of the business showed particular strength though volume of non-utility gas sold increased by 10%. Margins expanded as well and the aggregate increase in contribution margin topped 28% for this portion of the business. The utility portion of the business grew as well, with volume up a bit over 2% and contribution margin up just under 5%.
Tourism continues to recover in Hawaii and to drive a portion of the increased demand for gas that we’re seeing. Year-to-date through May, tourism is up 10% year-on-year according to the Hawaiian Department of Business Economic developments in tourism. In fact 623,000 tourists visited Hawaii in May surpassing the previous record for the month of just under 600,000 people. The previous record was set in May of 2007. So Hawaii very broadly looks to be back to pre financial crisis levels of tourism.
We continue to work with our colleagues at the gas company on solutions to the issues and more importantly the opportunities raised by the possible sale or closure of the Tesoro refinery on Oahu. While there has been no real news on that front specifically, the gas company is proceeding with its plans to commence the implication of LNG on a small scale. To that end, the business will soon file an application with the Federal Energy Regulatory Commission, the FERC, seeking approval of its plan to import LNG from the U.S. West Coast in standardized ship borne containers.
Assuming FERC approval, the gas company expects to commence importation of small scale LNG in late 2012 or early 2013.
Given the strong continued performance of the gas company during the first half of the year, we now expect the business to exceed our guidance for EBITDA or excluding non-cash items on the full year. We expect the business now to generate $55 million to $57.5 million in EBITDA for 2012. Excitingly, the refinancing of the gas company’s primary debt facility that we discussed last quarter, had proceeded smoothly as we expect that they would.
At this point, we’ve received commitments sufficient to refinance both the operating company and its immediate holding company level of debt facilities. Both offerings were oversubscribed in fact. The new packages will allow the gas company to refinance existing facilities and will provide additional capacity for funding future needs. The terms include all-in rates below what the business is currently paying. At present, we expect the refinancing to close in August. For that reason, you will see the existing facilities on the consolidated balance sheet as current debt but only for this quarter.
Trading in July has remained at levels consistent with our revised guidance. I’ve spoken on many previous occasions about the upside we saw at the gas company, and I’m pleased that we’ve been able to see it materialize. Though I must confess to being pleasantly surprised by the speed with which the company has achieved this growth. While there’s still a lot more that we are working on to improve and strengthen the business, the record growth will inevitably slow on the 28%.
In summary, the performance of the gas company through six months has been well above expectations and the outlook for the remainder of the year is quite positive. Absent the material downturn in the Hawaiian economy or some external shock, we expect the full year result from the gas company that is better than we had anticipated when we issued our guidance in February.
At IMTT, we again saw a top line growth driven by improvement in storage rates. Terminal revenue grew by 7.6% versus 2011 driven by a 5.8% growth in average storage rates. The difference between the revenue increase and the average rate increase reflects the larger volume of available storage this year versus last, and growth in the portion of terminal revenue that is not storage related. The 5.8% increase in average rates was consistent with our guidance at the end of last quarter. We continue to expect the average storage rates to increase in a range between 5.5% and 7.5% for the full year. For the end of the second quarter, only 31% of those contract is expected to renew in 2012 had actually been signed.
Utilization rates were flat with the second quarter of last year at 94.3% and then sequentially from the first quarter, as the greater number of tanks were offline for cleaning and inspection in the second quarter compared with the first in 2012.
Notably, the operating expense comps look good, without the recurrence of healthcare and repair and maintenance expenses this year that were a significant issue last year. We flag for some time that IMTT management needed to focus on better cost control, and we are pleased that they have finally taken some initial action on this front with more still to be done.
On expense, one expense item that does warrant discussion, however, is the tax line. In the first quarter of this year, IMTT booked a tax provision of $11.4 million. The provision was based on the estimated income and depreciation benefit on the capital assets placed in service to that point. However, GAAP required that the benefits of depreciations on all assets expected to be placed in service during the year be estimated when calculating the tax provision.
We’ve recalculated IMTT’s tax provision and determined that it should have been $4.8 million in the first quarter, not $11.4 million. The provision has been corrected through the second quarter and now assumes that IMTT will have a federal cash income liability of $12 million and a cash state income tax liability of $5.2 million for the full year. The actual amount of IMTT’s federal income tax liability will be a function of the dollar value of capital assets placed in service during the year and the bonus depreciation associated with those assets.
As we noted in the past, the benefit of depreciation of this kind of bonus depreciation is something of an “all or nothing” proposition. If the assets are in service, book for depreciation; if the asset is 90% complete, book nothing.
While our visibility into the continued operations of refineries in the Northeast is improving, the New York market and the Northeast in generally is less robust than it has been over the last few years. Recall that last quarter we talked about the uncertainty in the marketplace for storage, given the number of refineries that were up for sale or possibly closing.
As it looks now, given the various transaction that have been announced only one of Northeast refineries will actually close, that Sunoco’s Eagle Point refinery has been dismantled and scrapped. The impact on total refining capacity in the Northeast should be nil, given that Eagle Point has not been operating since 2009.
As we understand it, a number of the Northeast refineries have been kept running to process the heavy oil being produced by both the Canadian tar sands producers and the wet gas wells to the west of us in New York. The heavy feedstock is being blended with lot of grades to achieve a level of quality that the Northeast’s relatively older and less capable refineries can handle. This also means that they will continue to produce the residual products that are being aggregated for exported facilities such as IMTT, Bayonne. As a result, we don’t stand immediate need to convert large amounts of existing heavy oil storage at Bayonne to clean products. However, this could change. While the liquids hydrocarbon business is constantly evolving and we see this evolution continuing in the Gulf Coast, the New York market is certainly more nuanced than normal.
Given the strength of the results in IMTT through the first half of the year and what we believe we can see in terms of fundamentals of demand, we now believe that the business will generate EBITDA for the full year between $230 million and $240 million. Maintenance capital expenditures are also likely to be around $50 million. As I said a moment ago, at these levels the business will generate approximately $1.40 per share in free cash flow.
In May, the shareholders of IMTT jointly affirmed the March 30, 2012 arbitration award in court in Delaware. Now you’ll recall that the award provided that each of shareholders was to receive a $110.6 million in distributions, for the five-quarter period ended December 31, 2011. The affirmation permitted us to pursue satisfaction of the award through the court system, if necessary. Fortunately, however, on June 6th, IMTT distributed the $110.6 million to each of its two shareholders.
As noted during our last call, however, we have been unable to obtain the cooperation of our co-investors representatives on the IMTT board with regard to making quarterly distributions of free cash flow, as required under the shareholders’ agreement and the arbitration award. In particular, we calculated that the distribution of free cash flow for the first quarter should have been $22.6 million to its shareholder, but our co-investor refused to agree to the distribution of this sum, claiming that doing so would leave IMTT with an insufficient level of cash reserves.
For our part, we believe that had IMTT paid the $22.6 million per shareholder in dividends due under the shareholders agreement, the $220 million in cash reserves that IMTT would have still had at the end of the first quarter would have been considerably more than necessary to meet the normal requirements of the business as defined in the shareholders agreement and clarified in the arbitration award.
In July, we agreed to a distribution of $8.9 million per shareholder for the first quarter. However, each shareholder reserved all rights with respect to disputing the distribution amount payable while further discussions are held.
On Tuesday of this week we agreed to a distribution of $9.3 million per shareholder for the second quarter. Once again, each shareholder has reserved its rights with respect to disputing the amount of the distribution. If our co-investor continues to refuse to authorize the full amounts of the distribution for the first and second quarters of 2012 in violation of the shareholder’s agreement and the arbitration award, we will have to pursue collection of these sums in arbitration as we did in 2011.
To be clear, the payment of $8.9 million for the first quarter when we arrived at $22.6 million is not satisfactory to us. Similarly, the payment of $9.3 million for the second quarter is also not satisfactory to us. The payment of approximately $40 million in distributions or $0.85 per share for the year when the business will generate roughly $1.40 per share is just not sufficient. But it’s better than the zero, which is what we saw in 2011 but it’s not what the shareholders agreement and the arbitration award specifies.
I would note that we have the option of pursuing this matter in arbitration or in Delaware court as a result of having a firm de- arbitration award there. We believe however that if we do have to go down this path it will be a shorter process in arbitration than in court.
If we need to, we will pursue these and any future payments to which we are entitled by any means legally available to us. At each time we secure the distribution I believe that our board will do precisely what it said it would do and pay the substantial majority of these sums to our shareholders in a dividend.
In spite of our ongoing differences with our co-investor, there may be opportunities to grow IMTT through investment of additional capital. There are for example opportunities emerging as a result of the various shale gas exploration efforts underway.
As I said last quarter, once we have received the payments we are due, I'm optimistic that we can work together as owners of IMTT to say continue to grow and generate even more cash in the future.
To summarize, IMTT’s performance during the second quarter reflects continued strong demand fundamentals. We continue to pursue all appropriate means of securing payments of cash flows as required under the shareholders agreement with our co-investor. But that is background noise from the standpoint of an impact on the value of IMTT. Activity at IMTT through July supports our improved outlook for the business over the full year.
Moving now to Atlantic Aviation, Atlantic Aviation’s performance during the second quarter improved both sequentially and on the prior comparable period despite the slowing rate of the economic recovery in the U.S generally. However, it’s not rocket science to say that the growth would probably have been stronger if the U.S economic recovery was more robust. We see the slower growth coming through the FAA dollar with flight activity for each of the month of June and the second quarter down on the prior comparable periods.
The volume of general aviation fuel sold by Atlantic Aviation on a same-store basis however increased 1.5% an increase in average margins of 2.8%. On top of that Atlantic deliver sequential improvement in total gross profit and offset a modest non-GA gross profit decline.
As noted in the FAA data, the absolute numbers of general aviation flight movements across all airports reporting to the FAA has been declining this year. However, as always I remind you that the FAA data is indicative but not perfectly correlated with Atlantic’s performance. Significantly, based on internally generated data the number of general aviation flight movements at airports on which Atlantic has a presence actually increased slightly in the first half of 2012 compared with the first half of 2011.
Moreover, proportion of those aircraft owners and operators choosing to use Atlantic Aviation for FPO services increased as well. In essence, even in an environment featuring an overall decline in activity across the industry, activity levels and market share rose for Atlantic Aviation. And we would like to think this phenomenon is linked to Atlantic’s unparalleled focus on safety, excellent service and the popularity of the destinations at which we operate and Lou Pepper and his management team at Atlantic Aviation have done an excellent job delivering this result.
Atlantic’s personnel also kept a careful hand on the expense during the quarter. Although up compared with the second quarter of 2011, SG&A costs year-to-date were flat. Modestly higher range in benefit expense were offset by lower insurance costs.
Credit card expense, another component of the SG&A line, fell with lower fuel costs in the second quarter compared to the first and on the back of it first to negotiate the lower fees from the card providers.
Atlantic is expected to pay down another $7.5 million on its debt facility next week. As the $7.5 million being paid as of the end of the quarter, the leverage level of the business would have been reduced to 5.64 times at that point. Including the payment being made next week, Atlantic will have distributed $23.2 million to MIC this year. We expect another payment similar in size to those already made following the end of the third quarter. Thereafter of course the business will sweep essentially all of its excess cash to the reduction of its debt principle other than the cash it distributes to MIC under the tax sharing agreement in the loan documents.
As a reminder, similar payments with the sweep of excess cash, the interest rate hedge is related to the Atlantic Aviation debt we roll off. At that point, the all-in rise of the Atlantic’s debt facility would drop LIBOR plus 1.725% through the maturity of the debt in October 2014. Assuming LIBOR remains constant, interest expense in Atlantic will drop by approximately $30 million on an annualized basis. I would note that we expect to purchase an interest rate cap on the remaining debt, but the cost of that cap should be modest, probably less than $1 million.
Recent analysis of Atlantic Aviation’s performance suggest that the business has recovered by about the half from the loss of 2009. Management’s pain and continues to look for ways to reduce expenses and Atlantic’s exposure to the macroeconomic volatility. We continue to believe that the industry is in the midst of a cyclical recovery and that we would see continued growth in value of Atlantic. As evidenced, we note that July’s trading was strong. In fact it was stronger than the second quarter in spite of the weak start to the month that we attribute to the 4th of July falling in the middle of the week this year.
To summarize, volume and margin are up, expenses are under control and Atlantic Aviation is strengthening its balance sheet with the sweep of excess cash to debt principal. Atlantic’s financial performance through the first half of the year has been consistent with our growth. We are the tightening the expected growth of EBITDA excluding non-cash items to between $130 million and $135 million on the full year.
As we’ve marched to the Midwest this summer, Chicago has been quite hot and when it’s hot in Chicago, of course our District Energy business produces above average financial results. Gross profit at District Energy for the second quarter increased 10% over the prior comparable period. The improvement was driven by the hot weather and an increase in consumption revenue and by contractual increases in capacity rates generally. The gains were offset at the free cash flow level by the yearly obtainment of income taxes in 2012 compared with 2011. Please remember that we have 50.01% interest in this business. Based on the business’ performance through the first half of the year and it’s into another material shift in the weather, we would expect District Energy to finish the year at the high end of our guidance. We currently expect District Energy to produce EBITDA excluding non-cash items of about $22 million for the year. I’m pleased to report that based on preliminary numbers for July of 2012, July 2012 is in fact now the record month in terms of turn outs and cooling produced by the Chicago District system. It’s all very Olympics spirit of them to have set a new volume record in July.
That’s a look at our operating business, performances to date and laid out look for the balance of 2012. For those of you who have not seen our press release in June, I would also point that our manager has expressed his intent to reinvest both management fees and additional LLC interest through to the point that which we would be able to refinance Atlantic Aviation. From a modeling standpoint that has the effect of making the base fee a non-cash item. [Inaudible] it increases the distributable free cash flow by about $0.40 per share at the current share price.
Some of you undoubtedly noticed that the base management fee for the quarter decreased sequentially. That as a function of the calculation of the fee in which uncommitted cash on the balance sheet is an offset to the equity market capitalization. Thus the receipt of the distribution of $110.6 million from IMTT and its corresponding reduction in the calculation of mixed market capitalization resulted in a reduction in the base fee payable for the quarter.
You may also have noticed two additional elements of our corporate holding company level results. First the modest total return produced by MIC during the quarter, less than 2% using the methodology prescribed in our management services agreement was less than the total return produced by our benchmark index of the period. Therefore we lost a bit of ground relative to being in a position to generate an outperformance fee. From an outperformance fee to have been payable at the June quarter end, shares in MIC would had to have been trading at more than $39.40 and $40.60 as of July 31.
Last, I would like to point out that our corporate cost are higher than normal through six months primarily as a result of the cost we incurred in connection with the arbitration without co-investor at IMTT. The ordinary cost to SG&A expenses of the holding company should remain approximately $4.5 million per year. So the 50,000 foot perspective is that across all of our businesses, we saw a noticeable acceleration in our year-on-year gross profit growth in the second quarter. As I have said before, gross profit is the effective top line for MIC that I look at, the CEO. Aggregate gross profit grew year on year by 6.3% in the first quarter. But the growth rate accelerated in the second quarter to 9.7%. Cost control was also better in the second quarter. Expenses were up only 2.6% year-on-year. So across MIC we saw a 9.7% top line growth offset by 2.6% cost growth, leading to a 15.2% EBITDA growth.
For the first half of the year, all of our businesses are performing well. Expenses are under control, and capital management initiatives are proceeding according to plan. The fundamental drivers of continued good performance are intact and being reflected in the results through the first month of the third quarter. Thank you for your support and your continued confidence in our ability to deliver on our commitment to building shareholder value.
At this time I will ask that our operator open the phone lines for your questions and our CFO Todd Weintraub and I will be happy to answer any questions you may have.
Thank you sir. [Operator Instructions]. Our first question comes from Andrew Gadlin. You may proceed sir.
Good morning Andrew.
My first question relates to the IMTT issue of course. What formula is the co-investor using if they are not using the ones stipulated in the shareholder agreement?
That’s a very good question. What the voting trust has said is, notwithstanding the arbitration award clarification of the shareholders agreement, and notwithstanding what’s in the shareholder’s agreement, they would like IMTT to always have available to it even more cash reserve than it specified in that document. As I pointed out in my prepared remarks, had you paid the dividend that was due in the first quarter – that we said was due and we think the shareholders agreement is due, that would have left you with $220 million in available cash reserves in IMTT. From our perspective $220 million in cash reserves is greater than IMTT has available to it at most years during its history and it is [inaudible] that’s what’s required under the shareholders agreement. So they have just I would say randomly and idiosyncratically decided that they want more reserve.
Whether that’s because they genuinely think the company needs a bigger reserve than that or whether that’s just a convenient hook to hang this current issue on, I don’t know. And actually to be honest I don’t really care anymore. The issue is that the shareholders agreement specifies the amount of reserves IMTT should keep. The arbitration panel concerned the shareholders agreement in providing clarification on what that reserve is except for one shareholder to unilaterally say it needs to be more is obviously not acceptable to us.
I mean, they just lost an arbitration. Is the strategy to now raise the issue again and try to go to court?
I don’t know. I mean, I have got to say this strategy is totally okay from our perspective. So what I'm – and that’s why – so what I'm now focused on is purely what our strategy is. And what our strategy is to point out here is what the amount payable is and we will either go to court or to arbitration if we have to pursue that amount. I think this time around we will aggressively push damages and costs given that – we’ve already done this dance once. We have seen the movie, we know how it ends. The movie will end the same way the second time. I'm not sure that the sequel will prove to be any more exciting for anyone than the original.
Okay. The second question relates to the gas company refinancing. Could you talk a little bit about what you did there and some of your thoughts?
You know I'm hoping within the next couple of weeks that we will actually have this result as to what we will do. Very high level what we are going to do is I think put in place this two tranches of debt. A 10 year private Opco [ph] and then a five year bank piece at the Hold Co [ph]. Obviously the private placement at Opco will be 10 years fixed rate over that 10 years. And one of the reasons that we’ve done that is the part of the capital structure of TGC. We think it would be great to take advantage of what – I guess we view as the relatively low interest rate environment and lock that in for a long period of time, which you can have your 10 years is, which I think is appropriate for a utility like business.
Then on the bank debt, we will have that and we will also have a revolving debt piece at the Hold Co as well as the bank debt and with that revolver we will be able to fund growth CapEx and whatever working capital needs we had. Wells Fargo is driving that process forward for us at the moment. Obviously I would have hoped if I could have been perfect with the timing, the timing of that would have been to get that done before we file the Q. As it is I think it’ll run a couple of more weeks maybe. The all-in rate that we are going to pay on the debt when you sort of blend that and when we put the swaps in place or the hedging in place, that we’ll put in place on the bank debt piece of that. We’ll see our all-in rate of debt come down marginally from where it is at today. Obviously, how far it comes down from where it’s at today will depend on what the LIBOR swap is or when we finally swap out the base rate, which we’ll do when we finalize the facility.
But I’m very pleased that we’ve essentially been able to get some good long dated money and to reduce our total cost of debt. For that business, it was a great road show that we had for, as I said, both parts, but we are over-subscribed, and I think the reason it was over-subscribed is probably a function of two things obviously. The business is doing extremely well, and secondly, the credit market seems to be pretty good at the moment. And so, I think the confluence of those two events meant that the timing of this all came out pretty well for us.
Just to be clear, when you referenced the Hold Co., did you mean the gas company’s Hold Co. or did you mean MIC?
No. I mean, sorry, I’m glad you clarified that. I mean the gas company’s Hold Co, yeah. MIC, it’s not going to [inaudible] MIC ain’t going down the Hold Co. debt path. The current gas company debt facility is 50-50 between what’s called Opco and Hold Co debt. It’s an intermediate Hold Co. It’s not the MIC Hold Co. and that will be replicated in the new TGC structure, but not before – before anyone needs to put themselves onto a life support system, we’re not bringing back Hold Company debt at MIC.
Very good. Thank you so much.
Okay. Thanks, Andrew.
Thank you. Our next question comes from Ian Zaffino. You may proceed, sir.
Ian Zaffino – Oppenheimer & Co
Hi. Good morning. I guess I hopped a little bit late, so I was curious what you said about the distribution potential of Atlantic or did you not?
Yeah, let me just go through where Atlantic is at. Atlantic is contributing cash up to MIC at the moment in a 50% of the excess cash coming to MIC and 50% is paying down debt principal. For the last – from October to October, so from October 12 to October 14, the vast majority of the free cash flow will pay down the principal, however under the tax sharing agreement that’s in that line document Atlantic can still divided that amount of cash up to MIC and what that is basically is whatever the net income, the tax liability generated by the net income, Atlantic becomes a tax liability for MIC not withstanding that MIC has NOLs that it can use to offset that liability. It can actually divided up that amount of cash form Atlantic as if Atlantic were a standalone taxpaying entity so that we’ll see cash distributed up from during that period 2013 and 2014. And then I think what we see it is when 2014 comes, assuming that the business continues the way we think it will, assuming the deleveraging goes, and assuming that reify that business on sort of rights that we think are sensible. So there is a lot of assumptions in there. If that happens then in 2014 you should be – you should be seeing that business generating about a $1.70, a little more maybe in distributable free cash flow.
Ian Zaffino – Oppenheimer & Co
So, I guess – what is your definition distributable cash flow? Is that $1.70 the entire cash flow of that entity or and that’s the amount that shareholders in MIC expect to see?
I would say that’s the entire amount of the free cash flow there that we would probably – Atlantic, the maintenance CapEx of Atlantic is pretty predictable, pretty prefixed. The taxes will be pretty predictable at that point and the interest expense would be pretty predictable so that’s the amount that I expect we would be able to bring up to MIC. But we are obviously assuming that when we refinance this in 2014 there won’t be sort of cash sweep restrictions under the loan documents because at that point we think we’ll have got the leverage to a level where that’s the case. But that’s an event in sort of two years. But I guess what we are trying to do is give someone a sense that that's the sort of shape of once Atlantic is out or once Atlantic has been refinanced, once district energy has been refinanced, once all the issues with INTT are resolved you should have sort removed impediments to dividends, the free cash flow for the entity should be in excess of $4 by that point, and we’ve said we’d pay a very substantial amount of that in dividend as to how long it gets us, it takes us to get that period of time. You know, 2014 is the obvious hook to hang that on at the moment because that’s when the business comes up for refi, but we’ll be opportunistic with that, and obviously macro factors will play over the top of that.
But what I'm sort of trying to do is to say if you sort of said what will the free cash flow of the entity would be, of the whole organization be once these impediments are cleared, it will be substantially more than $2.50 that we are currently paying in for cash flow as a dividend.
Ian Zaffino – Oppenheimer & Co
Okay, okay. If my math is right it would be something like over $4 if you figure out all the refinancing, etcetera.
Ian Zaffino – Oppenheimer & Co
All right, thank you.
Thank you. Our next question comes from Brendan Maiorana. You may proceed.
Brendan Maiorana – Wells Fargo Securities
Thanks, good morning. So James you laid out a nice scenario and I just wanted to add up kind of the details that you were just going over. So I think you said it was $0.72 to Gas Company and $1.70 to $1.80 at Atlantic. District energy would cover corporate cost and IMTT would be about $1.40 as the sort of run rate numbers Q4, ’14. Is that right?
Brendan Maiorana - Wells Fargo Securities
Okay. So it would…
That’s not run rate Q4 ’14. That’s effectively what I would say run rate a bit sooner than, that's closer to sort of where we are trading today but assuming Atlantic had a sustainable capital structure could be.
Brendan Maiorana - Wells Fargo Securities
Sure okay. So you would get – presumably you are going to still get growth at TGC and you are going to get growth at IMTT and hopefully growth at Atlantic as well. So I guess that you get to the north of the $4 number, does that number – and I think you mentioned that District energy would cover the corporate expenses at MIC. Does this number include any adjustments for the manager fees that are currently paid in equity, not in cash, and any run out of the NOLs or maybe a cash tax payer in ’14?
If we make more adjustments to the base management fees, currently they are being paid in shares and so that’s what we have replicated and wrote through. If that changes at some point, we will obviously come back and recap those numbers, and similarly for cash taxes I think it hasn’t – cash taxes in 2014 at this stage look like that will be in play. There is more work that we are doing to see if we can push that date out still further. But at this point in time you are right, we haven't made any announcements and haven't actually got anything yet to announce on the tax planning stuff. So the base fees roughly have a $0.40 per share impact as I said during the script and at the moment that figure assumes sort of no cash taxes.
Brendan Maiorana - Wells Fargo Securities
Yeah. So do you have any sense of the desire of the manager to definitely get their fees in cash and would that impact your thoughts on the payout ratio as you would think about what you might use the payout ratio that is sort of assume that there could be less conversion over time? So if you would want to reduce the dividend if they – if you were setting your policy based on an equity distribution and then they ultimately decided to take any cash?
I think we don’t have any indication at this point in time as to the manager’s view other than the sort of extension that they provided in guidance, which is at least to Atlantic’s refinance. I think what is fair to say is that when we look at the next change to the dividends or the next increase that we put in place to the dividend, obviously all of those factors will be taken into account when thinking through what the next change in the dividend would be and I would then say at that point there would be another discussion between the independent directors on the board and the manager to find out what the base fee plan is. I think if you look at where we are at today, obviously in setting the dividend at the current level, Todd and I and the rest of the management team have to jump through an enormous number of hoops with the MIC board where they ask us for various scenarios and we run those, and look what if I jump through hoops, that’s exactly as it should be that we have to look at upsides and downsides and probabilities of various things playing out. And so I would expect as we – every time we make a change in that we will have to go through the cash taxes, macro economic outlook and manager fees will all factor into that macro scenario. So I don’t think people – what I don’t want to take away – to people to take away here is that because the free cash flow is likely to get to over $4 relatively soon, that will also mean that the dividend is going to get immediately to $4.
What I was trying to more indicate is that at $2.50 today people shouldn’t think, okay, it’s $2.50 and that’s where we are stopping. Our intention is to sort of express that if we had issues resolved with IMTT today and Atlantic were refinanced today we would be at a higher level than $2.50 today. None of those issues are resolved today. So we are not at a higher level than 2.50 today, but when they are resolved, all else being equal we will immediately be – I think significantly above $2.50.
Brendan Maiorana - Wells Fargo Securities
Yeah, that’s very helpful. It might be difficult to answer but, do you think that the payment of cash taxes is something that’s a significant payment of the cash taxes something that’s likely to happen or do you feel like you’ve got enough arrows in the quiver if you will to sort of reduce that burden if it ultimately comes in 2014 or 2015 or whenever you guys kind of run out of the NOLs?
Yeah. I think we have – we definitely have arrows in the quiver, as to whether it’s enough arrows in the quiver to push it all off forever. I got a couple of arrows in the quiver, haven’t yet got an excessive missile in the quiver. But, I think the order of magnitude if something did happen we were talking about was sort of roughly $25 million. But to put that into context when I first arrived as CEO we thought the NOLs and tax planning would cover us through the end of 2011 maybe into 2012. We’re now 2013, nudging into 2014. So along the way we keep sort of pushing it out and pushing it out. I know there are things that we are working on to keep pushing that out forever but I also want to – the $25 million figure I just sort of want to throw out there as – that’s currently a sort of size of bogie that we’re seeking to push out that could change over time. Obviously if tax laws change, if obviously any of those arrows in the quiver we end up shooting ourselves in the foot then that could change as well. That’s not – I mean that’s not my intension to do that. But I hope that gives you some sort of sense of order of magnitude.
Brendan Maiorana - Wells Fargo Securities
Yeah, I know that's great. Okay, thanks.
Thank you. Our next question comes from Mark Anderson. You may proceed, sir.
Yeah, my question has been answered. Thank you.
Sir I’m showing no further questions at this time.
Excellent. Well, in that case, all that's left for us to do is conclude with me saying again thanks for your participation. As always we welcome your comments and follow up questions. I really would like to thank our shareholders for their ongoing support of the business and their patience while we managed our capital management and issues to get our business balance sheet right. I’d like to thank the lenders to all of that business. They are a really important business partners with us and I enjoyed working with all of them to see our business continue to grow and prosper. I want to thank the many management team and staff in our businesses. I’ve already noted that TGC had a wonderful result this quarter and Atlantic did some excellent work over the last year for their passionate work.
We look forward to providing you with an update about results for the third quarter in early November and prior to that as events require. And as always please feel free to contact us with any questions but also any suggestions you have along the way. Thank you and good morning.
Ladies and gentlemen we thank you for participating in today’s conference. This concludes the call. You may now disconnect. Have a good day.