Macquarie Infrastructure Company LLC Q1 2010 Earnings Call Transcript

| About: Macquarie Infrastructure (MIC)
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Macquarie Infrastructure Company LLC (NYSE:MIC) Q1 2010 Earnings Call May 6, 2010 8:00 AM ET


Jay A. Davis - Investor Relations

James Hooke - Chief Executive Officer

Todd Weintraub - Chief Financial Officer


Rama Bondada - Macquarie Research

Greg Mason - Stifel Nicolaus

Brendan Maiorana - Wells Fargo Securities

Richard Shane - Jefferies & Company, Inc.

[Jacob Meeler - KYM Capital]


Good day ladies and gentlemen and welcome to the Macquarie Infrastructure Company first quarter conference call. At this time all lines are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions)

I would now like to introduce Mr. Jay Davis.

Jay A. Davis

Good morning and welcome to Macquarie Infrastructure Company’s earnings conference call covering the first quarter of 2010. Our call today is being webcast and is open to the media. In addition to discussing our financial performance eon this call, we have published a press release summarizing our quarterly results and filed a quarterly financial report on Form 10-Q with the Securities and Exchange Commission. Copies of these items are available on our website, www.

To help illustrate some of the key points in our results we have produced 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 this information at this time.

Participating in our call this morning are Macquarie Infrastructure Company’s Chief Executive Officer, James Hooke, and our Chief Financial Officer, Todd Weintraub. Before turning the presentation over to James, let me remind you that this presentation by Macquarie Infrastructure Company 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. It 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 by the forward-looking statements. Additional risks of which we are not currently aware could also cause its actual results to differ. The forward-looking events discussed in this presentation may not occur. These forward-looking statements are made as of the date of this presentation 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.

James Hooke

Thank you, Jay, and good morning and thank you to all of you for participating in our call today, especially those of you on the west coast given our earlier start time this quarter. We hope that the release of our results and filing of our 10-Q yesterday afternoon provided you with a better opportunity to review our performance.

I’ll begin our update this morning with a quick overview of our results. Two things stand out for this period. First, the overall performance of our bulk liquid storage business IMTT was outstanding. In the key area of cash generation, IMTT reported a year-over-year increase in free cash flow of 53%. The performance reflects the continued strong demand for storage and increasing capacity utilization and the contribution from projects completed during the past year.

Second, at Atlantic Aviation, the favorable trend in general aviation jet flight activity that began in the middle of 2009 continued through the first quarter of 2010. Activity on the airports which we operate was up 11% for the first three months of 2010 compared with 2009. The momentum was favorable within the quarter with activity up 14% in March compared with March in 2009.

As a result, fuel sales were up and although margins were down slightly, active management of the business produced free cash flow of more than $13 million for the quarter. That’s more than double the amount generated in the first quarter of 2009. In all, our businesses produced $36.7 million in free cash flow in the first quarter or approximately $0.81 per share.

This is an excellent result for MIC for the first quarter and provides a solid basis on which to build in 2010. I would suggest, however, that this figure should probably not be annualized for reasons I’ll go into in a moment.

Following some additional prepared remarks, we’ll take your questions about MIC’s performance and prospects. I’ll begin by providing some additional color on MIC’s operating performance during the quarter as well as commentary on some of the key elements of our consolidated results.

I will also have a few observations on our prospects for the balance of 2010. As most of you know by now, MIC is a cash driven story. As reported in our results press release last night, we enjoyed continued strong performance from our operating businesses during the first quarter. The cash produced in our businesses in the manner we employed during our full year 2009 results call in February.

The cash generated by IMTT has been retained for reinvestment. The cash generated by Atlantic Aviation has been deployed in the reduction of debt principal. Part of more than $24 million used to prepay debt in the quarter. The cash generated by the gas company has been retained to fund future growth capital expenditure needs, given that we’ve fully utilized our growth Cap Ex facility.

The cash position of the gas company increased by more than $5 million in the first quarter; about half our target for the year in that business. And the cash generated by District Energy has been retained to increase our holding company buffer. The cash position of the holding company improved by about $2 million, even after paying the costs related to the sale of the non-controlling interest in District Energy.

Diving a bit deeper, I’d like to focus on our two largest businesses first. Beginning with IMTT and the drivers of growth in cash generation. Revenue and gross profit at IMTT increased substantially in the first quarter of 2010. The increase was due to continued strong demand for bulk liquid storage, particularly in the key markets of Ney York Harbor and along the lower Mississippi river.

We see strong demand continuing. The strong demand enabled the business to achieve renewal rates on storage contracts that drove an increase in average storage rates of 10.2%. Capacity utilization increased as well; topping 96% for the quarter.

Maintenance and environmental capital expenditures were $7.8 million, although we expect that maintenance capital expenditure will tick up in the second quarter. For the full year, maintenance and environmental capital expenditures should be approximately $55 million.

In addition to strong performance by the terminal operations of the business, IMTT’s Oil Mop subsidiary posted positive results for the quarter as well. The business was involved in spill clean-up in the Houston ship channel in January and February; and subsequently Oil Mop was involved in a pipeline related spill clean-up.

Since late last week, Oil Mop has also been involved in the clean-up, if it’s related to the BP offshore rig explosion, and resulting spill in the Gulf of Mexico. Given the size of the spill and the all-hand’s-on-deck approach to containing and clean-up, it’s likely that Oil Mop will have an intensive and extensive involvement. For the moment, Oil Mop’s personnel and equipment are fully deployed and it’s not possible to assess the ultimate impact on either OMI or IMTT.

I should also note that the spill has yet to impact shipping on the Mississippi river. The U.S. Coast Guard has said it’s doing all it can to keep the access to the river open. Although the possibility exists that decontamination sites could be set up to scrub inbound ships if they’re forced to navigate through the spill. This could curtail the volume of shipping moving up river, as it did during the Bunker oil spill in the river in 2008.

Looking ahead. As we indicated during our February call, we are pursuing an amend to extend strategy with respect to the primary debt facility at IMTT. If successful, we expect to increase the size of the facility and extend the maturity date by at least a couple of years. In the current credit environment it’s certainly possible that IMTT could incur a higher cost of borrowing in the form of higher margin on a new debt package.

As we also indicated during our last conference call, IMTT expects that certain of its tanks on the lower Mississippi will be vacated and available for cleaning and inspection in the second quarter. This fact was contemplated when we developed our maintenance Cap Ex budget for the full year.

These cleanings and inspections will have the effect of lowering utilization rates, temporarily reducing EBITDA while the tanks are being cleaned, and increasing maintenance capital expenditure in connection with the cleaning and inspection process, relative to the first quarter. The extent of the cleaning and repairs required, and therefore the cost, cannot be known with certainty until the tanks have been opened.

Importantly, we do not foresee any dramatic shifts in the demand for storage over the near term in either of the key markets in which IMTT operates. IMTT continues to benefit from the fundamental supply/demand imbalance for storage in these markets.

Regarding the deployment of excess cash flow being generated, it remains our intent to reinvest in growth opportunities within the business. We are actively evaluating projects with a potential capital cost of approximately $150 million. If a reasonable portion of these turnout to be economically viable, both the upsize debt facility and the expected excess cash flow of IMTT would be needed to fund these projects.

At the end of the quarter, IMTT had approximately $49 million worth of previously disclosed growth capital projects left to complete.

Last, I would note that IMTT made a distribution of $5 million to each of its shareholders, including MIC, in the first quarter. Both shareholders agree that this relatively small distribution would not have an adverse impact on IMTT’s ability to fund its growth projects.

Turning to Atlantic Aviation, our market-leading network of fixed-base operations, pleasingly the upward trend in general aviation jet flight activity that began last year, has continued into 2010. As illustrated in the graphic on Slide 13, the increase in flight activity levels at the airports on which Atlantic operates, has been broadly consistent with that of the overall general aviation market.

The separation of the two lines on the graph reflects the increasingly broad recovery is now driving additional traffic to smaller airports in smaller markets. Markets in which Atlantic tends not to have a presence. The rate of growth in flight activity at airports outside the top 100 sites was 60% higher than the growth rate within the top 100 sites during the first quarter.

The second part of the story concerning the performance of Atlantic has to do with the impact of flight activity on the volume of fuel sold. Across Atlantic’s network flight activity was up about 11%, as I mentioned; but fuel volumes increased by about 9%. Although strong, about 94%, the correlation between flight activity levels and the volume of fuel sold at Atlantic Aviation will never be perfect.

Contributing to this difference is the fact that the size of the aircraft involved will impact the amount of fuel consumed. In addition, the length of the out coming flight segment, or the number of stops can also impact the result. A plane needs only enough fuel to get to the next destination and carrying more than that can compromise overall efficiency.

Importantly, however, the overall increase in activity helped Atlantic grow the total volume of fuel it sold during the first quarter. In addition to growing total volume, I’m pleased to note that Atlantic’s market share has increased as well. Market share is calculated using the number of gallons of fuel sold through Atlantic divided by the number of gallons sold on the airport; a data point provided by the FAA.

Let me put a little sharper point on the competitive landscape where Atlantic Aviation is concerned. In the annual survey of FBOs, conducted by Aviation International News, as reported on March 31, Atlantic’s overall satisfaction ratings improved in 2010 versus 2009. This is clear evidence from the most important third party, Atlantic’s customers, that the cost savings that have been achieved over the past year and half to two years have not come at the expense of service.

Another positive factor in Atlantic’s results is its post certification program. Atlantic has developed a disciplined set of aircraft towing requirements and mandated the involvement of all local and senior management. The program reinforces Atlantic’s belief that customers value and maniacal focus on safety.

The volume increase in the first quarter was, however, partially offset by margin compression. There are three factors that drove this element of the result. One is location; the second is customer mix; and the third is competition.

The location factor has to do with the relative weight of high margin versus lower margin sites in the portfolio. It’s the second factor, customer mix, that we believe has had the most significant impact on margins at Atlantic. As the market recovered from its lows in 2009, the common segments comprising the charter operators, fractionals, [inaudible] all of whom, historically, have been able to negotiate volume discounts on fuel purchases; represent a large portion of total sales.

These customers have led the upward trend in general aviation flight activity. We believe this is part of a fairly typical pattern of recovery [inaudible] customer-based recover. To a similar degree, average margins will revert to more historically normal levels.

We’ve elected to capitalize on the early stages of this favorable trend of increasing activity by entering into a new lease and constructing a new FBO at Will Rogers Airport in Oklahoma City, Oklahoma. This is a $6.6 million project for which we have a signed commitment letter from a third party band, providing $3.6 million [inaudible] in funding. MIC will write the equity check for this opportunity.

The demand for general aviation services in and out of Oklahoma City is strong and growing. As a result, the FBO is expected to generate incremental EBITDA of $1.6 million per year, on average, over the first 5 years. In effect, we are reducing Atlantic’s leverage while acquiring additional EBITDA at a multiple of less than 5 times. We believe this opportunity represents a prudent deployment of capital.

In addition to entering what will likely be a profitable new market, Atlantic’s also move to exit unprofitable ones. During the first quarter, Atlantic sold its lease and ceased operations at the airport in Kissimmee, Florida. The Kissimmee site did not generate positive EBITDA in 2009.

Atlantic is also undertaking another significant initiative. As most of you know, Atlantic Aviation today is a product of multiple acquisitions made over the past several years. With the additional FBOs, Atlantic has acquired a number of indoor contracts; including fuel supplier contracts. However, many of those contracts have, or will soon, expire.

Atlantic intends to take advantage of the expiration of these contracts and has begun to move towards providing unbranded fuel. The implementation of this initiative will occur over a period of 10 to 12 months. The change is expected to be completely seamless, as far as customers of Atlantic are concerned. They will continue to receive the same high quality service and products for which Atlantic is known.

We expect Atlantic will have expanded choices and improved purchasing with respect to fuel. And we anticipate the change will have a positive impact on Atlantic’s free cash flow. In the interim, while the growth and fuel purchasing initiatives are being implemented, the cost reduction measures put in place at Atlantic over the past 18 months have proven especially valuable.

The combination of lower interest payments resulting from the debt pay down over the past year, and the integration savings achieved to date help drive a substantial increase in the free cash flow generated by Atlantic in the first quarter. The $13.4 million in free cash flow generated in the first quarter of this year was more than double the $5.5 million generated last year.

We have updated our [inaudible] as to the amount of debt we believe Atlantic will pay down over the course of the remainder of the year. This number now looks like approximately $28 million, resulting in a total for the year of about $53 million, or about $8 million more than we had estimated at the start of the year. To the extent that general aviation activities continue to improve, the debt pay down could be higher.

We’re pleased with the trajectory that Atlantic is on and believe we are proving up the case for this business having meaningful equity value.

Our two smaller energy-related businesses performed substantially, as expected, during the first quarter. Looking first at the gas company, the increase in the contribution margin from the utility portion of the business reflects the impact of the rate case that was put into effect in June of last year.

As noted in our press release, the Hawaiian Public Utilities Commission has now issued its final order on that rate case. The final order reduced the previously approved increase by about 3%, from a $9.5 million revenue impact to a $9.3 million revenue impact. As a consequence, the gas company will refund the change in the rate case to those customers who are being billed at the higher rate. The gas company booked $216,000 as an adjustment to utility revenue in the first quarter, and reduced utility contribution margin accordingly.

In our full year results in [T&K], we noted the risks associated with the potential shut down of one or both of the refineries on Oahu. We also indicated that we felt we could accommodate a curtailment in the supply of locally produced propane through increased imports.

Two things have taken place since that time in regard to this issue. First, one of the refiners, Chevron, has confirmed that they intend to continue to operate on Oahu. Second, although the refiners were in operation during the quarter, the amount of propane produced was about 25% less than in 2009.

As expected, the gas company made up the shortfall in local supply by importing a sufficient additional quantity from foreign sources. Significantly, and I want to stress this, the importation of additional supply did not erode the contribution margin from the non-utility side of the business. We’ve seen a small decline in the volume through utility gas services, particularly among commercial customers. The reduced demand appears to be directly linked to the continued softness in the Hawaiian economy. The gas company is working aggressively to offset the reduced demand through active marketing of its products and services.

The increase in capacity revenue at our District Energy business reflects the net increase in the number of customers using the services at the Chicago system this year versus last year; as well as contractual increases in capacity charges. The decrease in consumption revenue is a product of two items.

First, lower electricity costs in 2010 compared with 2009, and a reduction in the amount of electricity used, show up as a reduction in consumption revenue. Second, District Energy has been actively engaged with certain customers in efforts to optimize the performance of the customer’s environmental systems. This has led to modest reduction in consumption revenue, but has the beneficial impact of creating saleable capacity without constructing additional chilling infrastructure.

In our view, this is a win-win outcome. There are a couple of noteworthy items in our consolidated results for the quarter that I would also call to your attention. First, in addition to the ongoing cost reduction efforts on the part of Atlantic Aviation, consolidate [inaudible] administrative expenses decreased as a result of holding company level initiatives that reduced both [stocks] and consulting expenses.

Secondly, our management [inaudible] elected to reinvest its base management fee in additional LLC interests. The line item fees to manager on our statement of operations is therefore a non-cash item. Third, the other significant changes in operating expenses include the write-downs of good will, other intangibles and property plans and equipment taken in the first quarter of last year. These items totaled approximately $44 million.

I would also point out that the interest expense line from both the consolidated entities and the operating entities individually now includes the non-cash losses on the change in the value of our interest rate [inaudible]. We had previously broken this out as a separate line item.

Of course, no MIC call would be complete without a comment on airport parking. As for those of you from bankruptcy court proceedings will know, the auction of the assets of the airport parking business took place on Tuesday of last week. We expect the sale to close in mid May and the impact of that to be reflected in our results of the second quarter.

The successful bidder in the auction is expected to pay $141 million for the assets. Obviously, this is more than the price specified in the original sale and purchase agreement. The higher price will reduce the amount of cancellation of debt income flowing through MIC’s income statement, although it will increase the gain on sale of the remaining assets. In any case, the tax impact of the sale will be absorbed by our [inaudible] consolidated NOLs.

In addition, as part of the settlement with the lenders and the Committee of Unsecured Creditors in the proceedings, MIC expects to receive unconditional releases from the parties from any future liability. In summary, we very nearly achieved closure on each of the high priority issues identified in 2009 and we are making good progress against those we have set for 2010.

Our businesses are performing well and we continue to add value through our active management of the capital structure and operations of these entities. We continue to evaluate good opportunities for growth in each of our larger businesses and, rest assured, we will deploy growth capital only when we have a very high degree of confidence in the outcome of these opportunities.

At this time, I will ask that our operator open the phone lines for your questions and I will join our CFO, Todd Weintraub, at a speakerphone. We will be able to listen to and answer those questions.

Question-and-Answer Session


(Operator Instructions) Our first question comes from Rama Bondada - Macquarie Research.

Rama Bondada - Macquarie Research

A couple of quick questions. On IMTT, you guys are looking at $150 million in potential cutbacks after this $49 million is completed, I assume. So how should we think about the cash generation in IMTT? Would it be more flowing through after this $150 million if you decide to go with that?

James Hooke

I think what we are indicating is at this point in time, we are reinvesting the vast bulk of proceeds from IMTT into the growth capital. In terms of the $150 million of opportunities, I would say broadly speaking of the nature and as attractive as the growth capital opportunities that we have in the hopper now in terms of what we are looking at to the extent that they materialize and we actually get to the point of signing the contract with prospective customers, we will go with that and reinvest the proceeds because we think the returns are sufficiently attractive to shareholders. But we will continue to give visibility around both the contribution of the underlying business to earnings and also the free cash flow generation from the new assets. I think the broad nature of the question is that at this stage, given how attractive those opportunities look, we intend to reinvest those proceeds in IMTT.

Rama Bondada - Macquarie Research

Also on the [inaudible] subsidiary at IMTT, I know you talked a little bit about the [inaudible]. Could you just give us a little bit of color around this business? We have talked about it a little bit in previous quarters to kind of get a better idea. What exactly does this business do? Is it more heavily involved in the beginning of a spill or is it more heavily involved in the middle or is it more like across the board, so we have an idea of when the cash would be coming through for the business?

James Hooke

Sure. There are two parts to the oil [mark] business. The first is the, I guess you would call it, steady stream tank cleaning and inspection business. That does tank cleaning and inspection for both IMTT and third parties as part of the broad tank maintenance program. The second is what I guess you could call the disaster recovery business that whenever there is a leak, we get involved. In terms of the stages that we get involved, I would say they are across the board from an immediate responder situation to an equipment decontamination and environmental remediation after the initial leak.

In terms of the general profile of the business, I note that we do more in the Mississippi River and the Houston Ship Channel and slightly less from an offshore perspective. As it relates to the specific leak to do with the BP rig explosion in the gulf, we were not the initial responder. That went to a more, I guess, traditional offshore responder. However, we have become increasingly more involved as that leak got closer to reaching landfall. I think that the two forms of involvement we will have is helping to protect the Gulf Coast, particularly the Louisiana coast, and secondly doing decontamination of equipment as it comes back.

One of the things we obviously have to realize is that the skimming vessels and booms that are going out there collecting the oil or preventing its movement at this point in time, when they come back into harbor, are potentially bringing with them contaminant and we are involved in the decontamination of that. We are also involved in sales of equipment and materials to deal with that business.

At this point in time, I think what we are focused on and the focus of that business is very much an all-hands-on-deck approach to ensuring the protection of the local environment for environmental reasons but also for the commercial reasons that we have seen and people involved in fishery and tourism and other industries there. At this stage, we are sort of more focused on sort of dealing with helping the Coast Guard and other responders deal with the disaster.

Rama Bondada - Macquarie Research

Just so we can get a relative picture, when you look at your total revenue opportunities that you had with the Texas coast cleanup, what was that [inaudible] and can you compare that cleanup effort to what we are kind of seeing currently? I mean, obviously the changing environment with the BP spill, but what are we seeing currently?

James Hooke

I would say at this point in time, the real thing that I guess drives the outcome is the duration of our involvement in these things and accordingly, at this point, we just have no visibility into the duration of our involvement down there because I think it seems at this point unclear to everyone involved, including BP, how long it will take them to put some kind of temporary tap and then a permanent tap on that. But the duration of involvement is really what drives it, and at this point in time, we just do not have a huge visibility into that.


Our next question comes from Greg Mason - Stifel Nicolaus.

Greg Mason - Stifel Nicolaus

To follow up on the IMTT, the potential $150 million of new opportunities, if those are decided to be undertaken, what is the timeframe you expect to build those tanks and to go into operation?

James Hooke

I think the answer is that we would commence building immediately upon execution of the contracts, so probably if you look at that in the second half and then as to how long it takes to complete those various projects, it will depend on the complexity of them. But I [inaudible] they will start to come online through 2011.

Greg Mason - Stifel Nicolaus

In the $50 million remaining in CapEx expense for this year, if you are tapped out on that credit facility, do you have any cash on hand to fund that or is the new Amend and Extend facility required to finish those $50 million CapEx?

James Hooke

We have sufficient cash on hand to fund all contracted, committed projects. So we do not need to go with the Amend to Extend. We will go with the Amend to Extend if we think that the [inaudible], the size of the upsizing of the facility and the pricing of it, we think that it’s an attractive path forward, so we will have to juggle those three. I guess the fundamental is that we do not need to do it. We would like to do it because it would increase our drive pattern and we think these opportunities have return. But we are not compelled to do it, if that makes sense.

Greg Mason - Stifel Nicolaus

Great. Moving on to the FBO segment, you cut expenses pretty meaningfully. Now that the business is picking back up, are there going to be required expense increases going forward? How should we think about that?

James Hooke

I think the guidance I would give on that is that marginally, I think we gave guidance for the year of $177 million of SG&A for 2010, which was down a little on 2009, down by about $179.5 million, so down about $3 million. At this stage, we are tracking a little better than that. I do not think it is the sort of material amount better than the $177 million and that is not withstanding some underlying volume increase that has come that I think is slightly ahead of where we had budgeted for the year.

So at this point in time, we remain confident that with the sort of volume increases we are seeing now, that SG&A guidance we have provided is sustainable. I think in all candor I would actually hope that at the next call, I can come back and tell you that I think the SG&A would be a bit above $177 million because that should mean that the flat activity volumes are even stronger than now. So that would be a nice situation to be in, not that we are not in a better situation now than we were, but that would be even nicer.

I think what I would say, and I have tried to provide guidance previously on, is that most of that $27 million of SG&A reduction we think will stick in terms of is not volume correlated. There is a component of it, like credit card fees and other components that are volume correlated and some components of staffing, which have a [inaudible] function increase especially at the smaller sites. At this point in time, we are kind of standing by that guidance for 2010.

Greg Mason - Stifel Nicolaus

Okay, great. On the maintenance CapEx for the FBO segment, last year you ran about $4.5 million. This quarter was at a $4 million annual pace. But if we look back, I think it was $6 million to $7 million previously. Have you been focused on specifically reducing maintenance CapEx and how long can that continue before you have to step those back up?

James Hooke

I would say there are a couple of components here. One component is that by virtue of the facilities that we acquired and the nature of the rollups, some of those businesses needed a little more maintenance CapEx and had been a little unloved for a period of time. The second component is that undoubtedly during the downturn, we took a haircut on all items.

I would say that we have become a little more focused and targeted in the prioritization of our maintenance CapEx, so I think there would be a minor increase potentially going forward. But I think it is in the sort of $1 million to $2 million variety rather than going back to the historical perspective. There is not a huge degree of science in me saying that because we sort of do it on a top-down basis and a bottoms-up basis. But I think that the historical level was probably slightly high by virtue of the rollup and in terms of where we are at today, I think we would say that we are probably being more targeted.

The main thing is we do not want to compromise the plant. I think the savings that we have seen have been things like at our second tier sites, letting the carpet run 1 or 2 years longer than we would and letting the repainting job run a year or two longer. But we really want to maintain that focus on plant and I take you back to that survey I reported from the Aviation International News which was on March 31. One of the categories of customer satisfaction there is our facilities and we recorded an improvement in our customer satisfaction with our facilities. So I do not think from a customer [inaudible] perspective or a safety perspective we have compromised the business, but yeah, I think we have been a little sharper in the way we have done things.

Greg Mason - Stifel Nicolaus

One final question. Again in the FBO, the new Oklahoma City FBO, two things. How did you win that business and, second, does that additional debt impact the FBO debt at all and what is the cost of that debt?

James Hooke

The first thing, I will talk you through the process and then I will have Todd Weintraub talk you through the nature of the debt. In terms of the process to win it there, we obviously have a facility at the second Oklahoma airport or PWA. By virtue of that, we had a pre-existing relationship with the Oklahoma City Airport authority because it is the same airport authority that runs the two airports.

Accordingly, by virtue of that relationship, we were able to negotiate successfully a 30-year lease, a 25-year initial term with a 5-year extension. It was an environment where we were very comfortable negotiating with that airport authority because we knew the nature of our existing lease at PWA. So that is how the process came about. We thought it was a good process. The second was that in Oklahoma City from… I think we talked about the general aviation market being up about 14% year-on-year in the first quarter. Oklahoma City was up 52.4% year-on-year in the end of the first quarter. It was one of the highest growing sites within the top hundred sites in the U.S.

Part of the reason for that is a new basketball franchise has relocated there. Obviously the energy businesses, especially Chesapeake Energy, are very strong in Oklahoma City. So that is why we like the opportunity. In terms of the debt package, the debt package will be provided by a stand-alone, separate lender. It will not be part of the Board Atlantic debt package. It will in fact be a separate collateral pool; albeit it is still held by the same holding entity that holds both the existing FBO locations and will share the kind of management.

The tenure of the term is essentially a project finance ten-year construction loan. Todd, I will let you provide a little more outline on the nature of that loan.

Todd Weintraub

As James mentioned, it is a ten-year amortization loan. The interest is at LIBOR plus 300 basis points initially. There is a floor on that of 4 and three quarters. When we get the certificate of occupancy, there is that option of staying at that floating or switching to a fixed, which was based on 5-year swap rate. We have that option for the first 5 years. Then the second 5 years, similarly we have the option to go floating or fixed. It is just a straight amortization over that 10-year period.


Your next question comes from Brendan Maiorana - Wells Fargo Securities

Brendan Maiorana - Wells Fargo Securities

Can you give us a sense of how impactual switching to unbranded fuel sales may be for Atlantic Aviation?

Todd Weintraub

At this point in time, I would say that we are still in the project process of scoping the full size of the opportunity and commitment there. I think, therefore, that it is probably a little bit premature to provide guidance on it. I think it is fair to say that the previous suppliers in that business were obviously not doing it as a charity, so there was a margin that they were making there.

We would expect that too to come on board. The timing and logistic issues in relation to that are still being addressed. Partly the timing at the different sites that we offer this will come online in a different sequence. Some of them will take more than 12 months; some of them will take 18 months. That is a function on when contracts come up and also what we can negotiate with the incumbents.

I think the only thing that I would say is that, without quantifying it, it is undoubtedly upside. It is not going to cost us more. We wouldn’t be doing it if we thought it was, so it is upside, but we don’t have quantum on it yet that we are providing guidance on.

Brendan Maiorana - Wells Fargo Securities

Sure, but it sounds like by at least end of the year ’11 or beginning of ’12, the full impact of that should be realized on whatever that impact may be.

Todd Weintraub

I don’t think the full impact will be realized by the end of ’11, but a noticeable component of the impact will be realized and then will be ongoing from ’11 onward.

Brendan Maiorana - Wells Fargo Securities

Sure. The $5 million dividend from IMTT is that just one time in nature or is that something we would expect quarterly?

Todd Weintraub

I wouldn’t expect that quarterly. I think where we were at with IMTT was by virtue of the fact that we had the money to complete the capital projects that we have underway. We didn’t have an immediate need for that. We thought it was a prudent thing for the shareholders to do.

I think we will continue to take that sort of opportunistic and pragmatic view, albeit the sort of underlying principal with IMTT is to the extent that there are broad capital opportunities that made our hurdle returns. We will plow that money back in, but if there is any period where there is a little of that money that is not needed and then I think that those shareholders are inclined to take that out. I think that will very much be situational and dependent upon the nature of the business.

I’d be surprised in any year if the distribution was zero, but I don’t think it should factor in on $5 million per quarter run-rate basis.

Brendan Maiorana - Wells Fargo Securities

So as I look at the businesses you have and you are making a little bit of incremental investment in the FBO business. I think about that you have cash that you are retaining and district energy because there is some growth capital there. You probably have maybe all of cash generation or a vast majority of it that you are retaining. IMTT, at the gas company is the plan to take the cash generation there? You have had to help pay down the debt levels at Atlantic Aviation. Is that included in your $28 million rest of the year debt reduction figure or is that all from Atlantic?

Todd Weintraub

The $29 million is all from Atlantic with no debt pay-down from any other source. As I indicated in the call that figure could be slightly higher to the extent that the aviation volumes and flight activity levels continue on their improved trajectory. In terms of the cash that we are retaining, I think you sort of transposed gas and electric company. We are retaining a little of the cash of the gas company, probably another quarters worth in relation to building the cash buffer of that business given that we had used up the growth CapEx facility. At District Energy we actually will be taking that cash-op to that holding company to provide a slight cash buffer there.

In terms of whether we will use any of the excess cash from District Energy and the gas company to de-lever Atlantic Aviation, I think at this point-in-time the answer to that is that it is highly unlikely as we don’t think we need to. I think what we saw in the Oklahoma City opportunity was a very compelling opportunity from a financial perspective to invest that had the collateral benefit of effectively de-levering that total entity. It doesn’t actually de-lever the senior facility on the main Atlantic pool because it’s in a separate pool, but for the combined entity it reduces that leverage level there.

In terms of the underlying question, which I think you are getting to, which is what is going to happen with the cash. I think what we said on that is that it will be in the second half of the year that we provide guidance on what we propose to do with that excess cash that is coming up or available to the holding company and what the use of that cash will be. So I think we are standing by that timing as to when we will give some guidance on what we propose to do with that cash.

Brendan Maiorana - Wells Fargo Securities

I guess as an outsider looking at it… I mean it is clear now that you’ve come through and you’ve paid down debt significantly at Atlantic Aviation and there’s equity value in that business. Thinking of getting to a normalized dividend level where you could get debt at a normalized level at Atlantic. Wouldn’t you just get to that as quickly as possible and then re-implement a normal dividend instead of doing something less than that in the back half of this year and then moving up to that?

Todd Weintraub

I think there are a number of factors in that where we are in the process of accessing across all the businesses that then provide the portfolio answer on that. In terms of what you said though, I agree with you that we have proven that Atlantic has equity value. I think if you look at the business.

It did $0.81 share in free cash flow. If you look at the LTM free cash flow per share we are at $2.54 LTM free cash flow per share and that free cash flow is growing. It is up by 10.6% for the year. At $2.54 LTM free cash flow, we are currently trading on [inaudible] free cash flow multiple, free cash flow per share. I think at 6.1 multiple on the free cash flow that this business generates is just materially too low, especially when you consider that that free cash flow is growing and grew by 10.6% year-on-year.

What we are trying to do is both get recognition for the fact that the cash generation of these businesses is growing. I think factoring all of those things in when we work through what we think of what the most optimal way of deploying that equity is. We are going to think through that and provide some more update on that in the second half.

Brendan Maiorana - Wells Fargo Securities

Okay. It sounds like the conversation I had. Thanks.


The next question comes from Richard Shane - Jefferies & Company, Inc.

Richard Shane - Jefferies & Company, Inc.

Thanks for taking my question. To sort of follow-up in context for the last question, looking at airport services, I realize last year at this time that all we were talking about was where you were in context of the maximum covenants. Now the question is what time point, given the current run-rate, do you think the cash leak could go away?

My recollection that the EBITDA triggers for cash leak once you go below 6 times and you get to retain 50% of the cash flow. Once you go below 5.5 times, you get to retain 100% of the cash flow. You reduce the multiple of almost half a multiple in this quarter alone.

What do you think the trajectory there is? Given just a stable run-rate in terms of revenues, how quickly do you think you can get to starting to release some cash?

Todd Weintraub

I think, Rick, your question is a good one and it is interesting in what a year makes initially focused on the ceiling of that debt facility and now focusing on the floor of it as to when we come out of lock up. I think the real issue here is that it just depends. It is going to be a top-line driven issue. I think we’ve got visibility into costs and maintenance CapEx. We’ve provided that visibility.

The real issue will be what happens with the gross profit line is really a question of what the take off and landing activity is. To that extent I don’t think we have any real significant greater insight into that at this point in time that any of the external observers to our business. It really is how does our economy continue to come back.

I think having said that I’ve seen scenarios that people have run that see us coming out of lock-up certainly in the 2012 time frame. It is just a matter of people running their own assessments as to how fast they think that gross profit will go based on how fast they think the sector will come back. But I agree with you. I have certainly seen scenarios that people have run, which people have run, which I’ve looked at and thought, yes that makes sense to me. That [inaudible] is coming out or that is plausible that sees us coming out of lock-up in this business when we get to under 6 times.

Richard Shane - Jefferies & Company, Inc

I appreciate it. That wasn’t an easy question to dodge. I appreciate you at least putting some time frame on it.


(Operator Instructions) The next question comes from [Jacob Meeler - KYM Capital]

[Jacob Meeler - KYM Capital]

Congratulations on strong results. Can you comment on the April 5 [inaudible] in the first quarter?

Todd Weintraub

The April activity at Atlantic?

[Jacob Meeler - KYM Capital]


Todd Weintraub

I would say that in April we saw a continuation of the trend that we had seen in the first quarter. I think obviously, you don’t have the same de-icing revenue in April. Having said that, we had some de-icing revenue last week, which I can say that we genuinely weren’t expecting.

I think in terms of activity levels we haven’t seen the FAA data for April, but I would really consider that that will be in line with the trajectory that we seen through February and March. I guess that we know that in the results call that March was stronger than February, which in and of itself was stronger than January. I think if you followed that trajectory through you would of said February was up 10%, March was up 4%. Was April up 15%? No. I would have been amazed if I brought it up by that. The FAA will tell us that, but we have seen good continuation in the year-on-year growth. I think to the extent that we say that there is a recovery in place in general aviation that recovery continued through April.

[Jacob Meeler - KYM Capital]

On the $150 million dollars in potential growth CapEx and IMPT, what kind of EBITDA are you looking at for that? What would be the return on that investment right now?

Todd Weintraub

I think that the way we typically… The first thing that I want to say with that is that we won’t spend that CapEx unless we have a contracted customer. We won’t build on spec. That is what we are waiting for is the finalization of contract. In terms of the typical contract in this industry, I would say that the typical way it works is for a new tank, the initial term of the contract, pays back the full cost of the capital. The initial term for these contracts are a little shorter depending on the complexity, the nature of the product, but ballpark around 6 years. There's a little bit of support infrastructure that has to go with that in terms of things like [inaudible] lines every now and then improvements to the transportation ingress or egress transport stuff and dock work.

But I think broadly speaking we're looking at that kind of a return, which is not dissimilar to what you've seen in the historical growth CapEx that you can pick up from our case. So that would put it in the vicinity of just that sort of simple math of around $25 million once it was on a run rate basis, once it was fully operational. So that's the order of magnitude I would say of what we're talking about.

[Jacob Meeler - KYM Capital]

Finally, on the way you're thinking about distributions. I guess this is really kind of what they're asking you on the last couple of questions. But when you view the businesses as far as distribution is concerned, are you looking at the business as a whole or is it kind of like when every business is in the proper standing you would look to distribute each one on a standalone basis?

James Hooke

I think that's still I would say a work-in-progress. I think in terms of each of the businesses we have a capital management strategy I guess for each of the businesses. So at this point for IMTT it's to reinvest for growth, for ASB or Atlantic at this point that strategy is dictated by the terms of the credit documents which see that business in cash sweep.

And for district energy and the gas company obviously we're effectively taking those distributable earnings from those businesses currently. Or be it in the case of TGC we're sort of, for a short period where we're topping up the growth CapEx facility. And I think we indicated that one of the reasons for that is we've drawn on that so that we could repay the holding company revolver a little sooner.

So I think the initial strategy is while we're in that situation is to look at it by a business perspective and then in the second half we'll communicate what we think the sort of totality and whole position is. I just go back to that issue, which I raised previously, which is sort of we provide very good visibility in what the free cash flow per share is.

And at 6.1 times multiple in free cash flow per share I think for these assets of this quality, given where we're at in the cycle and the fact that we've weathered the storm out, I think 6.1 times free cash flow per share just doesn't do full recognition to the quality of the businesses that we have in the portfolio.

[Jacob Meeler - KYM Capital]

I would agree. But the final question, what is the current cash level at the holding company currently, and what do you consider a normal level for cash at the holding company?

James Hooke

We haven't broken down the cash holding of the individual businesses. I think at this point in time the only guidance we've provided is that it's $2 million more than it was December 31. But I think if you look at the business as it stands, it doesn't require significant level of cash holdings at the holding company. I would say less than $10 million, but we're not trying to build a war chest.


I'm not showing any further questions at this time. I would now like to turn the program back over to Mr. Hooke.

James Hooke

Well firstly I'd like to thank you for questions and for your continued support of MIC. There's three groups that I'd really like to thank especially. The first is our lenders who continue to remain very important business partners to us, and we realize the difficulties that they and their businesses have faced over the last year. And fortunately their businesses are picking up as with ours, but we do thank them for their ongoing support.

Secondly I want to thank the management team at each of our assets and the employees at each of the operating entities. Each of them are faced with different challenges, but I think they've done an extremely strong job and express appreciation. And finally, I really want to thank our shareholder base, who've shown some great patience with us as we've sought to shore up the business, and now that the business is shored up have really gone on to show us some great support.

As always, I welcome your feedback and suggestions on things we've done differently. I reiterate our thanks to those on the West coast for coming online so early. We hope that the changes that we've made in terms of the reporting timing have provided greater opportunity for people to get information.

We look forward to speaking with you again at our update following the second quarter of 2010 in early August. And once again, at any stage Jay Davis from Investor Relations or I welcome your thoughts and suggestions. And thank you very much for your time this morning.


Ladies and gentlemen, this does conclude today's program. You may now disconnect and have a wonderful day.

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