ladies and gentlemen, thank you for standing by, and welcome to the Macquarie Infrastructure Corporation Third Quarter 2020 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Mr. Jay Davis. Thank you. Please go ahead, sir.

Thank you, and welcome to Macquarie Infrastructure Corporation's Earnings Conference Call, this covering the third quarter of 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-Q with the Securities and Exchange Commission. These materials were released this morning and copies may be downloaded from our website at www.macquarie.com/mic.

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 nonpublic 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 risks and uncertainties. A description of known risks that could cause our actual results to differ appears under the caption Risk Factors in our forms 10-K and 10-Q. 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-Q 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'Neil.

With that, it is my pleasure to welcome MIC's Chief Executive Officer, Christopher Frost.

Thank you, Jay, and thanks for those of you joining our call this morning. I hope you and your families are safe and well. Together with our financial results for the third quarter published earlier this morning, we announced that we have entered into an agreement to sell IMTT. We will discuss both the sale and the quarterly results on our call this morning. Given the good performance of IMTT this year, we have been able to move forward without the suite of strategic alternatives, notwithstanding the challenges presented by COVID-19.

Following a robust process, we are pleased with the outcome of the sale of IMTT and how it positions MIC to continue to pursue strategic alternatives and further unlocking our value for shareholders. Specifically, we have entered into an agreement to sell IMTT to an affiliate of Riverstone Holdings LLC for approximately $2.685 billion, including the assumption of IMTT's $1.1 billion of debt outstanding.

The sale is expected to close late in the fourth quarter of 2020 or early in 2021, subject to the receipt of required approvals and satisfaction of the conditions presetting in the agreement. At this point, we do not believe there are any material hurdles to closing in the anticipated time frame. Regarding the use of proceeds, it is our intention to apply all the net proceeds from the sale to the payment of a special dividend and the reduction of holding company debt.

First, following closing, it is our intention to make a special distribution to shareholders of approximately $10.75 per share in cash. Second, we expect to apply approximately $400 million to the repayment or offset of our holding company-level convertible notes. The MIC Board will set a record date and payment date for the dividend after closing.

capital gains taxes of approximately $158 million; transaction expenses in addition to those already incurred of approximately $25 million; and the disposition payment to the company's external manager of approximately $28 million.

Considering the expected use of sale proceeds, we expect our leverage ratio to be approximately 4.3x net debt to trailing 12-month EBITDA. If we did not apply a portion of the proceeds to the holding company debt, our leverage ratio would likely be over 6x, a level we do not consider prudent. Cash currently on hand will be used to repay or offset the amount outstanding on our revolving credit facility or potentially to fund the repurchase of a portion of our shares.

If we do not repurchase any shares and the cash is not required to manage our leverage during the coming year, we will look to return it to shareholders in a subsequent special dividend. In any case, shareholders will receive the benefit of any surplus capital, either as an increase in net proceeds on the sale of the remaining businesses or as distributions prior to such sales. With the agreement for the sale of IMTT, we have characterized the business as a discontinued operation for financial reporting purposes as required. Nick will cover this in more detail shortly.

In summary, we are pleased with the outcome achieved in the sale of IMTT. It leaves MIC in a strong position relative to moving forward with the processes for Atlantic Aviation and MIC Hawaii in a manner and at a time consistent with maximizing value for shareholders.

Touching briefly on the performance of our businesses in the third quarter. We remain focused, above all, on ensuring the health and safety of our employees and customers. We continue to be fortunate that we've had a low incidence of COVID-19 among our employees, a circumstance attributable to the diligence of the teams on the ground. Our businesses remained open and operational, and each has continued to enhance safety measures for employees and customers.

one, stable general aviation flight activity at levels consistent at the end of the second quarter, but lifted the contribution of Atlantic Aviation on a sequential basis; and two, the continued impact of COVID-19 on the tourism industry in Hawaii. Together with the results for Corporate and Other, our ongoing operations generated adjusted EBITDA that was down 13% versus the third quarter of 2019, but substantially higher than the levels recorded in the second quarter of this year.

Importantly, we expect to see sequential improvement in EBITDA generation over the next 12 months and believe that our businesses will continue to produce sufficient cash to fund ongoing operations and growth capital projects to which they had previously committed. Looking more closely at the performance of our operating businesses. Atlantic Aviation and the U.S. general aviation industry showed continued resilience through the third quarter. Domestic general aviation flight activity was stable throughout the quarter, down by approximately 14% industry-wide versus the prior comparable period.

Consistent with the end of the second quarter, Atlantic Aviation saw a shifting in patterns of activity towards primarily leisure-oriented locations and away from business-oriented locations. International and event travel, which we previously highlighted as key contributors to a full recovery remains subdued. Atlantic Aviation continues to monitor this closely and believes the recovery will largely depend on a more complete rollback of COVID-19 precautions across geographies.

As expected in this context, activity at the airports on which the business operates was lower than the industry overall, down 19%. And the deeper decline reflects the weighting of its network toward larger, more populous and business-focused regions, although that weighting remains a positive for the growth of the business over the long term.

Similarly, fuel sales continue to be disproportionately affected by the shift in mix, the use of smaller aircraft on shorter flights, and were down approximately 23% versus the prior comparable period. Regarding cost savings at Atlantic Aviation, the management team continues to control operating expenses, allocating resources as necessary to locations with increasing activity. Year-to-date cost savings, excluding the environmental remediation provision booked last quarter total approximately $15 million.

The sustainability of these savings will depend on the rate of recovery in flight activity, although it is expected that expense reduction efforts this year will yield some permanent savings. The performance of MIC Hawaii was steady in the third quarter due to the continued requirement for visitors to quarantine for 14 days on arrival, meaning that the state was effectively closed to tourism throughout the quarter.

Tourist visits were down 94% during the third quarter compared to the same period in 2019, resulting in a 37% reduction in the amount of gas sold as demand remained muted for commercial customers, including resort hotels and restaurants. Importantly, on October 15, the governor lifted the 14-day quarantine requirement provided visitors can demonstrate that they have tested negative for COVID-19 within 72 hours prior to arriving in the islands. Since then, the number of visitors to Hawaii has increased, although the recovery is likely to be gradual and result in a modest uptick in gas sales over the remainder of the year. That assumes, of course, lockdowns or quarantine requirements are not reimposed.

The management team in Hawaii continues to control costs while maintaining safe and reliable services to its customers. Although classified as discontinued operation, I note that IMTT continued to perform well in the third quarter. Utilization averaged 95.8% and ancillary services revenue were broadly flat with the prior comparable period. Market conditions remain constructive for storage across most products, and that was reflected in contract renewals during the period. All capacity that came up for renewal was re-leased to new or existing customers at marginally higher storage rates.

Certain customers sought to renew contracts early to ensure continued access to storage capacity. IMTT's management team maintained strong cost control, with expense increases related to COVID-19, largely offset by reductions in other areas. At this point, I'll turn the call over to Nick for some additional color on the results for the quarter as well as our outlook on performance for the remainder of the year.

Thank you, Chris, and good morning, everyone. Before I discuss our financial results for the quarter, I would like to provide a bit more color on our classification of IMTT as held for sale and therefore, a discontinued operation. In the current period, IMTT is the only entity in discontinued operations, but in the prior reported periods, our solar and wind power generation businesses as well as the joint venture interest in a solar power development company were discontinued operations as well.

Designating IMTT has held for sale triggered 2 additional events, both of which are flowing through our financial results for the quarter. First, by entering into an agreement that is likely to result in the sale of IMTT in a taxable transaction, we booked the tax on the difference between our book and tax basis in the business as a deferred liability. The $158 million increase in our deferred tax liability will become a current liability on closing of the sale. Second, we are required to assess the carrying value of our investment in IMTT for any impairment.

That assessment indicated that the carrying value was greater than the scale value, fair value being determined by reference to comparable businesses in the market, less costs associated with selling the business. Consequently, we wrote down the value of our investment in IMTT by $750 million, of which $725 million was goodwill. You can see that in the financial statements and footnote for discontinued operations.

We also reviewed the carrying value of both Atlantic Aviation's and MIC Hawaii's assets, including goodwill, and determined that no impairment was required in respect of those segments. Collectively, our continuing operations, Atlantic Aviation, MIC Hawaii and the Corporate and Other segment showed strong improvement in the third quarter from the lows of the second quarter.

Consolidated adjusted EBITDA, excluding noncash items generated in the third quarter, totaled $60 million, down from the $69 million recorded in the prior comparable period. Adjusted free cash flow conversion was good, although lower interest expense and lower maintenance capital expenditures did not wholly offset an increase in tax liabilities this year. In total, MIC generated adjusted free cash flow of $38 million in the quarter, down from $50 million in the prior comparable period, but up nicely from the second quarter.

Regarding our operating businesses. Atlantic Aviation generated EBITDA of $54 million in the quarter, down on the prior comparable period, but up sharply from the $17 million recorded in the second quarter. I note that second quarter EBITDA included a $7 million provision for remediation of environmental matters. Expense savings continue to support Atlantic Aviation's financial performance. As Chris noted, net savings year-to-date have been approximately $15 million. Excluding the expense increases in the first quarter of the year, savings achieved since the start of the pandemic have been approximately $18 million.

While savings remain activity-dependent, Atlantic aviation was generating savings of approximately $2 million per month as of the end of September. Atlantic Aviation's free cash flow generation was strong at $39 million versus $42 million last year. Lower interest expense, taxes and maintenance capital expenditures made up for some of the decline. Based on Atlantic Aviation's current performance, the business is expected to be able to meet all its obligations, including the funding of the growth projects to which it has committed using internally generated resources. MIC Hawaii generated EBITDA of $7 million in the current period, the same as in the second quarter, compared with $12 million in the third quarter in 2019. The business continued to be affected by the state's mandatory quarantine of visitors during the quarter.

Free cash flow was $4 million compared with $8 million in 2019. The looking ahead, we expect MIC to generate EBITDA from continuing operations for the full year 2020 of between $200 million and $215 million. As Chris discussed, Atlantic Aviation is showing steady performance, and that has continued through October. Assuming a continuation of current trends through the balance of the year, we expect Atlantic Aviation to generate EBITDA of between $185 million and $195 million in 2020. We expect MIC Hawaii to generate EBITDA for the full year in the range of between $35 million and $40 million, reflecting our expectations around a gradual recovery in tourism that Chris noted.

Our consolidated EBITDA guidance assumes holding company-level expenses in the Corporate and Other segment of approximately $20 million. We ended the third quarter with $429 million of cash on hand across our continuing operations, including $150 million drawn on our corporate revolving credit facility. You'll recall that we drew down on our revolving credit facilities out of an abundance of caution at the beginning of the pandemic. Given the performance of the ongoing businesses in the third quarter, we repaid $449 million of the $599 million drawn. Given the sale of IMTT, we will review repayment of the balance at closing.

At the end of September, leverage was 5.7x net debt-to-EBITDA in our ongoing businesses over the trailing 12-month period. Considering the use of proceeds from the sale of IMTT, we foresee heading into 2021 with consolidated leverage of approximately 4.3x, as Chris mentioned, with the expectation that EBITDA growth will reduce leverage from that level during 2021. I will now hand the call back over to Chris for final comments. Thank you.

Thank you, Nick. The third quarter was an exciting and extremely busy one for MICS. We are pleased with the outcome of the sales process for IMTT and with the results generated by our ongoing businesses, Atlantic Aviation in particular. We continue to expect to see a recovery going into 2021, which will support our ongoing pursuit of sales of the remaining businesses. We continue to believe that the sales of MIC or its remaining businesses is the best path to unlocking value for shareholders. [ And last ], assuming the remainder of the year plays out as expected, we will end 2020 in a strong position with ample financial flexibility going forward.

With that, I thank you again for your participation in our call this morning. At this time, I will ask the operator to open the phone lines for your questions.

[Operator Instructions]

And your first question is from the line of TJ Schultz with RBC Capital Markets.

Congrats on the transaction. I just want to look ahead to aviation. So on Atlantic, to transact on that, do you feel you need to see the complete picture after the COVID impact subsides or do potential buyers once you see the impact?

And if the largest question, the flight activity levels for some of these large events? Or is it the run rate of general corporate travel post-COVID? Just any color on the timing of that process.

Yes. And TJ, as I said in the prepared remarks, we remain committed to the sale of MIC Hawaii and Atlantic Aviation to unlock value. We haven't set a timetable for completion of those transactions. And based on our pre-COVID valuation marks of Atlantic Aviation, I believe it is likely to be our most valuable operating business. And therefore, I think, waiting a period of time until we see full recovery of general aviation traffic would be the value-maximizing strategy for shareholders even when you look at time adjusting the distributions.

And so I would sort of say that we anticipate -- and as I also said in the prepared remarks and on previous earnings calls, that we expect this year to continue to remain at current trading level, so say, 20% down on flight activity. But as we move into 2021, we anticipate further recovery in business traffic, further recovery in terms of international and event-driven traffic. So that's the way we're thinking about it at the moment.

Okay. And then on this point, what are the expected tax impacts for the sale of Atlantic or Hawaii or the leverage you have there from a tax strategy perspective?

Well, I think as I've sort of said previously, to the extent we would have sold Atlantic aviation via a takedown of the listed entity, that would be a tax-free transaction for shareholders. Hawaii, we haven't disclosed the tax status for that business, but there would be some tax leakage to the extent that we would only execute the sale of Hawaii through a sale for cash.

Your next question is from the line of Tristan Richardson for Truist Securities.

I really appreciate all the commentary around IMTT there. I -- one quick question there. Could you talk about the tax line item that you called out for IMTT? Was the goodwill write-down beneficial to basis for the purposes of taxes? Or was it -- is it just kind of reflective of where your basis was?

Tristan, so the goodwill write-down was sort of -- didn't have a tax impact. The amount of taxes that we've disclosed or the $158 million is more reflective of where the tax basis of MIC's investment in IMTT was and obviously, the purchase price paid by -- we expect it to be paid by late December.

Helpful. Appreciate it. And then, Chris, I appreciate the commentary on the remaining 2 businesses. It sounds like the guidance, I'm paraphrasing here, but assumes sort of a gradual recovery in Hawaii, but no specific recovery in Atlantic. Is that kind of a fair way to think about the $200 million to $215 million?

Do you want me to take that, Chris?

No. Look, I'm -- I think, as I've sort of said in the prepared remarks, Tristan, that we anticipate the balance of this year will probably stabilize at what we're seeing at the moment. But our expectation is that in 2021, as we see an increase in business activity and we also see an increase in international traffic and events, that is likely to close out the recovery over the course of 2021.

Your next question is from the line of Steve Trusa with Tenor Capital.

Congratulations on the IMTT sale. Wanted to delve a little bit deeper. I know in the press release, you've mentioned that the company looks to repay or offset holding company-level debt of the $400 million approximately for the convert. If you could delve a little more deeper into the whole cost of repay or offset. I'd appreciate it.

I'll take that. So, I think, the first comment is that we're obviously pleased to be able to reserve enough cash to take out the converts. We think that's obviously important in ensuring that we've got a prudently managed balance sheet. In terms of the sort of language, there is no event, if you like, that is triggered by the sale of IMTT as it relates to those converts.

And so we'll have a look at the repayment of those converts post-closing the sale of IMTT.

So the bottom line is you don't think there's a change in control put or a requirement to the feasi bonds? Okay.

That's correct. So, that's correct.

Okay. I view it a little bit differently, but thank you for the color.

Thank you, ladies and gentlemen. I would now like to turn the conference over to Christopher Frost.

Thank you for participating in our conference call today. We look forward to speaking with you on our next quarterly call or prior to that if the circumstances warrant. With that, I wish you a good day.

Thank you, ladies and gentlemen, for participating in today's conference call. We ask that you now disconnect your lines.