Macquarie Infrastructure Holdings, LLC Common Unit

Good morning and welcome to the Macquarie Infrastructure Corporation's fourth quarter and full year 2020 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to Jay Davis, Head of Investor Relations. Please go ahead.

Thank you and welcome to Macquarie Infrastructure Corporation's earnings conference call, this covering the fourth quarter and full year 2020. Our call today is being webcast and is open to the media. In addition to discussing our financial performance on this call, we have published a press release summarizing the results and filed a financial report on Form 10-K with the Securities and Exchange Commission. These materials were released this morning and copies may be downloaded from our website at www.macquarie.com slash MIC.

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Before turning the proceedings over to Macquarie Infrastructure Corporation's Chief Executive Officer, Christopher Frost, 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 Corporation is prohibited. This presentation is based on information generally available to the public and does not contain any material non-public information. The presentation has been prepared solely for information purposes and is not a solicitation of an offer to buy or sell any security or instrument. This presentation contains forward-looking statements. We may, in some cases, use words that convey uncertainty of future events or outcomes to identify these forward-looking statements, including those used to describe the anticipated specific and overall impacts of COVID-19. Forward-looking statements in this presentation are subject to a number of risk 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. The forward-looking events discussed in this presentation may not occur. These forward-looking statements are made as of the date of this presentation. We undertake no obligation to publicly update or revise any forward-looking statements after the completion of this presentation, whether as a result of new information, future events, or otherwise, except as required by law. During today's call, we will reference the non-GAAP measures, earnings before interest, taxes, depreciation, and amortization, or EBITDA, and free cash flow, as defined by us. A reconciliation of these non-GAAP measures to the most comparable GAAP measures can be found in our 10-K and in the tables attached to our earnings press release. Also participating in today's call is Macquarie Infrastructure Corporation's Chief Financial Officer, Nick O'Neill. With that, it is my pleasure to welcome MIC's Chief Executive Officer, Christopher Frost.

Thank you, Jay, and thanks to those of you joining our call this morning. Along with our financial results for the fourth quarter and full year 2020 published earlier this morning, we filed a registration statement with the SEC whereby we proposed to reorganize the company to be able to sell Atlantic Aviation prior to selling MIC Hawaii without incurring corporate capital gains tax. Subject to SEC clearance and shareholder approval, we would expect to implement the reorganization only after we have entered into an agreement to sell Atlantic Aviation and just prior to closing of such sale. We also filed a scheduled TO and offered to purchase our convertible senior notes via a tender offer commencing today. We will discuss the proposed reorganisation, our 2020 results, the tender offer and our guidance for 2021 on our call this morning. Turning to the proposed reorganisation. During prior calls, I have said that our pursuit of strategic alternatives would likely maximise value through separate sales of our operating businesses. Currently, the most efficient process would entail the sale of MIC Hawaii, followed by the sale of Atlantic Aviation as the remainder of MIC. This sequence would be tax efficient as corporate capital gains tax would only be paid on the sale of the relatively smaller MIC Hawaii business. The sale of Atlantic Aviation via a sale of the stock of MIC would not give rise to corporate capital gains tax. However, the sale of MIC Hawaii would be subject to the approval of the Hawaii Public Utilities Commission or the Commission. As is customary in transactions involving regulated utilities, receipt of the approval from the Commission could take 12 months or longer. The approval process could delay the sale of Atlantic Aviation or make the sale subject to the prior completion of the sale of MIC Hawaii. Our highest priority is maximizing shareholder value through the sales of our remaining operating businesses. Therefore, we are proposing to reorganize MIC to facilitate the sale of Atlantic Aviation prior to the sale of MIC Hawaii without incurring corporate capital gains tax. To achieve this, we intend to reorganize MIC into a listed limited liability company, or LLC, taxed as a partnership. At the same time, we intend to distribute MIC Hawaii up to the LLC. The LLC would then be able to sell Atlantic Aviation and distribute all the net proceeds to unit holders. The last step in the process would be the sale of the LLC, then owning only MIC Hawaii. Completion of the sale of the LLC would be subject to the Commission's change of control approval process I mentioned earlier. We need shareholder approval for the reorganisation, which we may seek potentially in late May. To be clear, we expect to implement the reorganisation only after we have entered into an agreement to sell Atlantic Aviation and just prior to the close of such sale. The Board firmly believes that the reorganisation is in the best interest of shareholders as it may facilitate the sale of Atlantic Aviation in a tax-efficient and timely manner. Turning to the performance of our ongoing businesses in the fourth quarter and full year 2020. Above all, we continue to focus on ensuring the health and safety of our employees and customers. Our businesses have remained open and operational and have continued to serve their respective customers without interruption.

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We are extraordinarily grateful to the employees in our operating businesses, many of whom are in the field every day delivering the essential services provided by Atlantic Aviation and MIC Hawaii. MIC's financial and operational results for the fourth quarter and full year primarily reflect, one, improving general aviation flight activity that resulted in a contribution from Atlantic Aviation at the upper end of our expectations, and two, The easing of travel restrictions in Hawaii during the fourth quarter that drove an increase in gas sales and results from our MIC Hawaii segment also at the upper end of our expectations. Together, our remaining operating businesses, including corporate and other, generated adjusted EBITDA of $66 million in the fourth quarter and $220 million for the full year. At the individual business level, Atlantic Aviation benefited from stable general aviation flight activity during the fourth quarter. On average, flight activity at the airports on which Atlantic Aviation operates was down approximately 18% versus the fourth quarter in 2019, a slight improvement from down 19% in the third quarter on the same basis. The period around the holidays and New Year were particularly good with several locations reporting growth in flight activity versus 2019. As a result, general aviation flight activity was down by an average of just 15% in December compared with the same period in 2019. Underpinning the result was the continued generation of a meaningful level of gross profit from hangar rentals. Atlantic Aviation continues to invest in hangar capacity at many of its locations, including the recent doubling of hangar space in Montrose, Colorado via an acquisition, and new construction that will result in a 50% increase in hangar and office space at Chicago Executive Airport. Expenses remained under control in the fourth quarter, and full-year savings totaled $22 million versus 2019. The management team at Atlantic Aviation continues to evaluate expenses across the board and believes that approximately $5 million of the savings achieved will be permanent. As a result, Atlantic Aviation generated adjusted EBITDA of $58 million in the fourth quarter and $195 million for the full year. The contribution from MIC Hawaii improved in the fourth quarter with the state reopening to visitors from the mainland as well as from Japan, Korea and Canada. As a result, gas sales increased, particularly at the end of the fourth quarter during the holiday period. Gas sales were down 27% versus the fourth quarter of 2019, compared with being down 37% in the third quarter. The improvement reflects the reopening of some of the resorts, restaurants and commercial laundries in Hawaii. With the improved activity, MIC Hawaii generated adjusted EBITDA for the fourth quarter of $12 million and $41 million for the full year. The trends we saw in the fourth quarter of 2020 at both Atlantic Aviation and MIC Hawaii have continued into early 2021. At this point, I will turn the call over to Nick for some additional color on our capital management strategies and guidance for 2021.

Thank you Chris and good morning everyone. I trust you and your families are safe and well. As Chris mentioned at the outset of the call, today we launched a tender offer for any or all of our 2% convertible senior notes due 2023. The tender offer is at par, plus accrued interest, and will remain open until March 16, 2021. We encourage note holders to refer to the tender documents we have filed this morning for details on both the terms of the offer and how to accept it. Together with the special dividend of approximately $960 million that was paid on the 8th of January, A successful tender will see MIC deploy all the net proceeds from the sale of IMTT as foreshadowed in our announcement of the sale last November. Assuming all the convertible notes are tendered, we will have no debt at the MIC corporate level as we repaid the balance outstanding on our revolving credit facility prior to year end. I would point out that following the sale of IMTT, our corporate revolver was cancelled in accordance with the terms of that agreement. Leverage across our continuing operations was approximately four times net debt to 2020 adjusted EBITDA at year end, after adjusting cash on hand for the special dividend and costs and taxes in relation to the sale of IMTT. Today, with approximately $330 million of unrestricted cash across MIC, after providing for both the tender offer and taxes and costs related to the sale of IMTT, our liquidity position is strong. Regarding our outlook for 2021. We assume a successful rollout and effectiveness of COVID vaccine programs in the US and internationally throughout the year. For Atlantic Aviation, we expect that with the rollout, general aviation flight activity will recover from current levels beginning in the third quarter and will reach 2019 levels by the end of the year. Importantly, We also expect the industry to revert to pre-COVID flight activity patterns, including a return of international, event and business-oriented travel. For MIC Hawaii, we do not expect the number of visitors to Hawaii to recover to pre-COVID levels this year. As a result, we expect gas sales to be in line with 2020. As noted in our press release, we expect Atlantic Aviation to generate EBITDA between $220 and $240 million in 2021. Our guidance for EBITDA generated by MIC Hawaii in 2021 is a range of between $30 and $40 million. We expect the costs recorded in our corporate and other segments to total approximately $20 million in 2021, in line with 2020. Corporate another reflects net costs related to the short-term provision of transition services to IMTT and the absence of a profit share payment from a prior investment in a renewables platform. We therefore expect MIC to generate consolidated EBITDA in a range of $230 to $260 million in 2021. Maintenance capital expenditures are expected to be elevated relative to historically normal levels, including some catch up from 2020. We expect to generate consolidated free cash flow in a range of $130 to $160 million. Importantly, we expect free cash flow generated for the year to fund growth capital expenditures and require denomitisation. Growth capital expenditures are forecast to be 70 to 80 million dollars, of which approximately 40 million dollars is expected to be invested in projects currently underway or to which we have previously committed. Most of the growth investments relate to Atlantic Aviation. They include both projects that we are undertaking to renew or extend airport leases and projects that increase the revenue generating capacity of our FBOs, for example, through hangar developments like those Chris mentioned earlier. Debt amortization is expected to be approximately $11 million for the year, almost entirely at Atlantic Aviation. We do not expect to reinstate a regular dividend in 2021. In addition to the $11 per share special dividend paid in January, we intend to focus on returning capital to shareholders in the form of net proceeds from the sale of our operating businesses in the manner Chris outlined earlier. At this point, I will hand the call back over to Chris.

Our highest priority remains unlocking shareholder value through the sale of MIC or separate sales of Atlantic Aviation and MIC Hawaii. The proposed reorganization of MIC provides us with additional flexibility in this process, notably with respect to the timely and tax efficient sale of Atlantic Aviation prior to the sale of MIC Hawaii. Additionally, we intend to apply a portion of the proceeds from the sale of IMTT to the retirement of our convertible notes and have today launched a tender offer for any or all the notes. Our fourth quarter and full year financial and operational results reflect improving fundamentals at each of Atlantic Aviation and MIC Hawaii, and both businesses are performing in line with our expectations in 2021. We have initiated guidance for the full year based on the assumption that the rollout of COVID vaccine continue as planned. I again want to thank our employees for their resilience during what has been a challenging year. Thank you again for your participation in our call this morning. I will now ask our operator to open the phone lines for your questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question today comes from TJ Schultz of RBC Capital Markets. Please proceed with your question. Good morning, TJ.

Hey, good morning. Thanks. Just first on the reorganization of the structure, just so I have it straight. So if you sell aviation first and those proceeds are distributed, do you still eventually get the tax impact when you sell Hawaii? Thanks.

Yeah, a couple of things in that. You're right that under our current structure, TJ, if we were to sell the Atlantic aviation from under MIC, that would incur capital gains tax. on that transaction with the proposed restructure, it will enable us to sell Atlantic Aviation before MIC Hawaii without incurring capital gains tax. The distribution up to the LLC of MIC Hawaii is a taxable event. So as I outlined in our prepared remarks, if we were to sell MIC Hawaii first and then a takedown of the listed entity compared to restructuring, selling Atlantic, and then a takedown of the LLC, all other things being equal, the after-tax net proceeds would be unchanged.

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Okay, understood. And then just one question on the outlook for aviation. As you look for aviation activity to get back to 2019 levels, looking into maybe next year, do you expect the mix between business, international leisure, and some of the larger events to be similar? Or are some activity levels potentially offsetting declines that we could see in some of the business travel? Thanks.

Look, I think, as we sort of said in the prepared remarks, TJ, our expectation is that once there's been a successful rollout of vaccine programs, that we are likely to see an acceleration in the recovery of demand for GA, particularly around international event-driven and corporate travel. And, you know, based on our conversations with customers, I suspect that there is significant pent-up demand for travel and that when government restrictions and the fact that there is widespread vaccine rollout, we're likely to sort of see that recovering to normalised levels by end of 2021 and returning to normal patterns of activity by 2022.

Okay, thank you.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. Our next question is from Josh Colvison of BAM. Please proceed with your question.

Hey, guys. Just to flush out the timing a little bit, you said... you would hold, like if you were to sell Atlantic aviation, then you would file for shareholder approval. I'm just a little confused on, on if you could just sort of call, if you could just sort of walk through the timeline of, you know, how all of that would have like, is it like landing aviation deal is announced and then we go through the shareholder process or, I mean, just how does that work exactly again?

Yeah. So what I noted in my prepared remarks is that we require shareholder approval to affect the merger and that based on our current timeline that we would anticipate seeking shareholder approval for the merger potentially in late May. I also made the point that we do not intend at this stage to implement the merger until such time as we have entered into an agreement to sell Atlantic Aviation and just prior to the close. And the reason for that reflects our objective that we acknowledge the fact that an LLC may give rise to index eligibility issues and that may cause a potential rotation of the register. Therefore, our objective is to minimize to the extent possible, the period of time that the LLC will own Atlantic Aviation, and to the extent that the LLC owns Atlantic Aviation, we have already entered into an agreement to sell it, and completion is imminent, as well as the proposed use of proceeds and any special distribution coming out of that. So the first step of the process is to seek shareholder approval for the reorganization, but not to put it into place until such time as we've entered into an agreement to sell Atlantic, but just prior to close.

So then, I mean, when you say that, it seems to me like you would like to have a deal to sell Atlantic Aviation before the end of May.

No, I think I sort of separate out the approvals that we need to go through in order to implement the restructure and that the seeking shareholder approval to implement the restructure may or may not be the same timetable as the sale of Atlantic. What I would say with respect to our objectives for the sale of Atlantic is that it's certainly my objective that we complete a sale of Atlantic this year.

But you could announce it, I mean, theoretically, tomorrow and then go through the shareholder reorg part and then close it. It's only the period of time between when the actual reorg happens and the sale closes that you're concerned about?

I'm sorry, I'm not sure of the question.

I'm saying from when you were talking about the turnover in the shareholder register and the possible index implication, the concern is from the time the reorganization is actually implemented to the time Atlantic Aviation closes.

Correct.

And so what we're saying is that... You could announce Atlantic Aviation tomorrow, in theory, right? It takes a few months for a deal to get done.

have the reorg sometime in between there and then close atlantic aviation after that yeah yeah that is a possibility i think what the point we were making was um you know the the shareholder approval process for the reorganization um uh we will be uh looking to see potentially in late may um we're just simply making the point that once we have obtained shareholder approval, we would only implement the reorganization following having entered into an agreement and prior to the close for the reasons that I outlined.

I got it. Okay, great. Thanks so much, guys.

We have reached the end of the question and answer session, and I would now like to turn the call over to Christopher Frost for closing remarks.

Thank you for participating in our conference call today. I hope you and your families continue to remain safe and well. We look forward to engaging with you over the coming months and updating you on our progress at our next quarterly call or prior to that as circumstances warrant.

Thank you. Thanks, everyone. Cheers.

This concludes today's conference. You may now disconnect your lines at this time. Thank you for your participation.

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