Macquarie Infrastructure Corporation Reports Third Quarter 2015 Financial Results, Increases Cash Dividend
Macquarie Infrastructure Corporation announced that its Board of Directors has authorized the payment of a cash dividend for the third quarter of 2015 of $1.13 per share ($4.52 annualized). The payment represents an increase of 15.3% over the $0.98 per share paid following the third quarter of 2014. The dividend will be paid on November 17, 2015 to shareholders of record on November 12, 2015. MIC has increased its cash dividend in each of the last eight quarters.
“We are again returning a substantial portion of the cash generated by our businesses to our shareholders. Including our third quarter dividend we will have distributed approximately 74% of our adjusted proportionately combined Free Cash Flow over the past year,” said James Hooke, chief executive officer of MIC. “Assuming the continued stable performance of our businesses through the remainder of the year, it appears likely that we will be able to deliver slightly more than our previously forecast 14% year-on-year growth in cash dividends in 2015 and we remain confident in our ability to generate dividend growth of at least 14% again in 2016.”
Among MIC’s four lines of business, its Atlantic Aviation subsidiary again delivered particularly strong results during the third quarter. The consistent growth in general aviation flight activity in the U.S. and volume of fuel sold per flight saw same store gross profit generated by Atlantic Aviation increase by 8.5% and 8.7% in the quarter and nine month periods ended September 30, 2015, respectively. The growth in reported gross profit, including acquisitions, was 9.2% and 15.4% in the quarter and nine month periods ended September 30, 2015, respectively.
Growth Opportunities
MIC’s Free Cash Flow in excess of the amount paid out as a dividend is available to finance further growth of the Company. Hooke indicated that MIC was actively pursuing potentially attractive investment opportunities across all four of its existing infrastructure verticals. “In addition to retained capital, MIC has access to more than $1.0 billion in undrawn committed debt facilities that can be tapped to fund acquisitions and growth projects,” said Hooke. “We believe that opportunities to expand our portfolio of renewable power assets and FBOs are growing and we remain very interested in developing our gas-fired power generation capabilities in Bayonne, NJ. Further, we have never been involved in more discussions about midstream assets than we are at present.”
On October 13, 2015, MIC completed the acquisition of an additional solar power generation facility. The facility, located on the island of Oahu in Hawaii, is expected to generate approximately 6.5 megawatts of renewable power when completed. MIC estimates that the facility will commence commercial operations in the middle of 2016.
Through September 30, 2015, MIC had deployed approximately $75.0 million in growth projects and small, bolt-on transactions. Including investments announced since quarter end, the total is in excess of $100.0 million. Management believes the Company will deploy growth capital and completed bolt-on acquisitions with a value in a range of between $225.0 million and $250.0 million for the full year 2015.
Hooke noted that the number and scale of growth opportunities for MIC in 2016 and beyond has increased over the past three months. “As we have indicated previously, we intend to deploy on average about $250.0 million per year in growth projects and small, accretive acquisitions,” he said. “Our backlog of growth projects is now in excess of $262.0 million with $85.0 million of this projected to be invested in the fourth quarter. These projects, together with a historically normal $100.0 million per year in bolt-on transactions and an expected $130.0 million of capital to be deployed in the expansion of BEC in 2017, provide us with visibility into our anticipated growth capital deployment for more than two years.”
Impact of Timing of Maintenance Capital Expenditures
“Our businesses continued to deliver stable performance,” added Hooke. “While our businesses performed well, maintenance capital expenditures and their treatment in connection with the acquisition of IMTT last year, together with the timing of expenditures at IMTT and Atlantic Aviation in 2015, have created challenges in comparing our quarter over quarter results in the third quarter.”
In the third quarter of 2014 IMTT deployed $11.2 million of maintenance capital compared with $12.0 million in the third quarter of 2015. In 2014, however, the majority of the third quarter expenditures were made prior to MIC’s acquisition of the second half of IMTT during which time MIC recorded IMTT’s results on a proportionately combined basis. As a result, MIC only reported $6.2 million as its share of IMTT’s maintenance capex in the third quarter of 2014.
As management had previously indicated, maintenance capital expenditures at IMTT in 2015 have been weighted to the second half of the year, in contrast with 2014 when they were weighted to the first half. IMTT deployed $8.5 million during the first half of 2015, $12.0 million in the third quarter and is expected to deploy approximately $20.0 million in the fourth quarter for a total of approximately $40.0 million for the full year. Overall, MIC expects IMTT’s total maintenance capital expenditures for 2015 to be approximately 10% lower than in 2014.
The reduced level of maintenance capital expenditures at IMTT, together with the strong operating performance at Atlantic Aviation, enabled MIC to opportunistically increase maintenance capital expenditures at Atlantic in 2015 as previously reported. In the third quarter Atlantic deployed $6.8 million versus $2.6 million in the third quarter of 2014. Similarly, Atlantic deployed $13.0 million on maintenance capital expenditures through the first nine months of 2015 compared with $4.6 million during the comparable period in 2014. While expenditures are expected to revert to historically normal levels in 2016, the increases in 2015 expenditures provide Atlantic Aviation with increased financial flexibility in the future.
“The timing of maintenance capital expenditures resulted in the generation of adjusted proportionately combined Free Cash Flow of $112.1 million or $1.41 per share – a good result and substantially above the consensus estimate of $1.30 per share,” Hooke noted. “However, removing the effect of maintenance capital expenditures at each of IMTT and Atlantic Aviation on our results reveals that what appears to be an approximately 3.0% year on year growth in adjusted proportionately combined Free Cash Flow per share is actually better than 9.0% per year in the third quarter and more than 24.0% through nine months versus the same period in 2014.”
Primary Drivers of Changes in Proportionately Combined Measures at September 30, 2015
Gross Profit – Gross profit increased 26.8% to $233.6 million for the quarter and 40.4% to $684.5 million for the nine month period. The increase was attributable to:
– Contribution from IMTT acquisition;
– Stable storage pricing and an increase in storage utilization at IMTT; partially offset by reduced tank heating and spill response activity in the first half of the year;
– Increases in general aviation flight activity and contributions from sites acquired by Atlantic Aviation during 2014 and 2015;
– Acquisitions of the Bayonne Energy Center in early 2015 and an additional wind power generating facility in late 2014 by CP&E, partially offset by the sale of District Energy in the third quarter of 2014; and,
– Increases in the volume of gas sold by Hawaii Gas in the first half of 2015.
Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), Excluding Non-Cash Items – EBITDA increased 45.6% to $160.3 million and 54.6% to $463.0 million in the quarter and nine month periods, respectively, primarily as a result of an increase in gross profit in both periods, offset by higher selling, general and administrative expenses in the nine month period, especially professional fees associated with various transactions in which the Company was involved. Selling, general and administrative expenses for the quarter decreased primarily due to the absence of acquisition related costs in 2015. The increase in selling, general and administrative expenses in nine months was attributable to:
– Consolidation of expenses of IMTT;
– Incremental costs associated with acquired gas fired power generation and wind power generation facilities;
– Higher labor and benefits, rent and professional services fees in the third quarter at Atlantic Aviation, and incremental expenses in the nine month period primarily related to the acquisition of additional FBOs;
– Higher professional services fees at Hawaii Gas in the third quarter related to intervention in the proposed Hawaiian Electric Industries/NextEra merger and ongoing efforts in relation to development of Liquefied Natural Gas (LNG) initiatives; and,
– Costs associated with the conversion of the Company from an LLC to a corporation in the nine month period; partially offset by,
– The absence of acquisition related costs; and,
– Improvements in cost control at IMTT and the absence of costs incurred in 2014 related to the IMTT acquisition.
Cash Interest – Excluding derivatives gains and losses, interest expense increased 21.5% to $27.4 million in the quarter and 53.9% to $81.8 million in the nine month period. The increase in cash interest expense was attributable to:
– The consolidation of IMTT;
– Incremental debt associated with acquisitions of wind power facilities and BEC, including interest on holding company revolving credit facility; and,
– Interest expense associated with convertible senior notes issued in July of 2014.
Cash Taxes – Cash taxes decreased 86.3% to $150,000 and 96.7% to $598,000 in the quarter and nine month periods, respectively, primarily as a result of the inclusion of IMTT in MIC’s consolidated tax group. As a result of an increase in deductible expenses, primarily performance fees, MIC does not expect to incur a material federal income tax liability until late 2019 at the earliest.
Maintenance Capital Expenditures – Maintenance capital expenditures increased 94.2% to $20.8 million in the quarter and 27.8% to $38.3 million in the nine month period. The increase was attributable to:
– Higher maintenance capital expenditures at Atlantic Aviation as a result of a decision to pull certain expenses forward (based on the better than expected performance of the business and reduced expenditures at IMTT);
– An increase in maintenance capital expenditures at IMTT in the third quarter resulting from a weighting of the deployments of capital to the second half of 2015.
Free Cash Flow – Free Cash Flow increased 85.9% to $92.8 million in the quarter and 70.1% to $291.8 million for the nine month period as a primarily as a result of the consolidation of IMTT, and the acquisitions BEC and wind power generation facilities, together with improved results generally. Adjusted proportionately combined Free Cash Flow increased 20.4% to $112.1 million in the quarter and 63.7% to $351.6 million in the year to date period. Adjusted proportionately combined Free Cash Flow excludes:
– $19.2 million and $50.6 million of swap breakage costs in the quarter and nine month periods in 2015, respectively;
– As a result of the successful refinancing of the majority of the debt across its businesses, MIC believes that swap breakage fees incurred over the next several years, if any, will be minimal;
– $9.3 million of transaction expenses related to BEC primarily in the first half of 2015; and,
– $43.3 million of transaction expenses and voluntary pension contributions primarily related to IMTT in the third quarter of 2014.
MIC regards Free Cash Flow as an important tool in assessing the performance of its capital intensive, cash generative businesses. Proportionately combined Free Cash Flow refers to the consolidated Free Cash Flow generated by MIC’s businesses other than its interests in the partnerships in solar and wind power generation, after holding company costs. See “Use of Non-GAAP Measures” below for MIC’s definition of Free Cash Flow and further information.
MIC’s reported increase in adjusted Free Cash Flow was partially offset on a per share basis by an increase in the number of shares outstanding. The increase in share count reflects the impact of capital raised in connection with the acquisitions of IMTT and BEC and the reinvestment in shares of base and a portion of the performance fees earned by the Company’s Manager during the twelve months ended September 30, 2015. No performance fee was payable for the third quarter of 2015.
Consolidated Results for the Third Quarter and Nine Months
Reported net income attributable to MIC was $10.6 million for the third quarter of 2015 compared with net income of $991.0 million in the third quarter of 2014. For the nine months ended September 30, 2015, MIC reported a net loss of $141.5 million compared with net income of $1.0 billion in the comparable period in 2014. The substantial net income generated in each of the third quarter and nine month periods in 2014 reflect primarily a non-cash gain from acquisition/sale of business related to the IMTT acquisition and the sale of the district energy business, partially offset by a $116.6 million performance fee incurred during the third quarter, the consolidation of IMTT and the acquisitions of a wind power generation facility.
MIC’s consolidated revenue for the third quarter of 2015 rose 7.0% to $415.7 million compared with the third quarter in 2014. Consolidated revenue increased 30.9% for the nine-month period ended September 30, 2015 versus the comparable period in 2014. The increases reflect the contribution from acquisitions concluded during the past year, and growth in the volume of products sold, partially offset by a reduction in energy costs, such as those for aviation fuel, which are generally passed through to customers of MIC’s businesses and recovered in revenue.
Reported gross profit – defined as revenue less cost of goods sold – removes the volatility in revenue associated with fluctuations in energy costs. MIC’s consolidated gross profit increased 29.6% to $236.3 million in the third quarter of 2015 compared with the same period in 2014. For the nine months ended September 30, 2015, the Company’s gross profit increased 68.8% versus the comparable period in 2014. The increases in both periods reflect primarily the impact of acquisitions concluded in each of 2014 and 2015 and contributions resulting from growth at Atlantic Aviation, partially offset by the sale of District Energy in August 2014.
MIC’s increase in consolidated operating income for the quarter reflects primarily the absence of a performance fee in the third quarter of 2015, the consolidation of IMTT and acquisitions of BEC and wind power generation facilities, reduced professional fees resulting from fewer transactions, and increases in depreciation and amortization primarily related to acquisitions concluded during the preceding year. The operating loss for the nine months ended September 30, 2015 reflects the impact of the items above entirely offset by increased performance fees incurred in the first six months of 2015.
