Bristow Group Inc (VTOL) 2013 Q3 法說會逐字稿

Good morning. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Era Group Q3 earnings call.

(Operator Instructions)

Thank you. Mr. Bradshaw, you may begin your call.

Thank you, Nicole.

Good morning and thank you for joining our conference call today. I'm here with our CEO, Sten Gustafson, and Chief Accounting Officer Jennifer Whalen. By now you should have a copy of our earnings press release for our third quarter and our quarterly report on Form 10-Q. Each of our SEC filings and earnings press releases is available under the Investor Relations link on our website, eragroupinc.com, and also on the SEC website, sec.gov.

If you have not already done so, I would encourage you to access one of those sources to print or view a copy of the presentation slides that accompanied our press release. We will be referring to certain slide numbers during the course of our prepared remarks.

Before starting the call, I would like to note that management may discuss forward-looking statements on this call. These forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from those expressed and/or implied by the forward-looking statements as described in our most recent annual report on Form 10-K, our subsequent quarterly reports on Form 10-Q, and the other filings we make with the SEC.

In addition, we may discuss non-GAAP financial measures during the call, such as adjusted EBITDA. Please see our earnings release or the investor presentation on our website for the calculation of these measures and the appropriate GAAP reconciliation.

Now I would like to turn the call over to our CEO. Sten?

Thanks, Chris. And welcome, everyone, to the call.

In reviewing our quarterly highlights, I will compare the current quarter versus both the prior year's third quarter, as our business does have a fair amount of seasonality, as well as this year's second quarter, which highlights the impact of the partial return to service of our EC225s during the current quarter. As you may recall, all of our EC225s were working during the third quarter of last year, none of them last quarter, except for the two remaining on contract lease, of course, and only some of them for a portion of this quarter. We will address the EC225 suspension and its impact on our results in greater detail later in the presentation.

Turning to our operational highlights for the third quarter on page 5, and Chris will cover these in greater detail a little later, I will note that we delivered another strong operating performance this quarter, resulting in record third-quarter operating revenues of $81 million, a 4% increase over the prior year's quarter, and a 9% increase over the second quarter. I am happy to say that thus far every quarter this year has seen record revenues for that respective quarter. Net income attributable to Era Group this quarter was $5.2 million, essentially flat relative to last year but up 3% over second quarter. Our adjusted EBITDA for this quarter was over $25 million, an 11% increase over last year, and 9% over last quarter.

Excluding asset dispositions, our adjusted EBITDA this quarter was 3% higher than last year's and 22% above second quarter's. As you can see, the suspension and then the resumption of service for the EC225 has had a meaningful impact, which I will discuss in greater detail in the next slide. I am pleased to say that we managed to achieve these solid results in spite of a number of other challenges this quarter, including delayed cash receipts from Aeroleo and lower hurricane-related revenues relative to last year's quarter.

Turning to slide 6, let's discuss the EC225 situation. With the root cause of the service failures now identified, Eurocopter has implemented engineering solutions and prevention and detection measures to remedy the matters that led to the suspension of operations, which have been approved by EASA, and led the civilian aviation authorities of both the UK and Norway to lift operational restrictions on the aircraft. With the implementation of these measures, and related regulatory approvals in place, the EC225 has largely returned to service on a worldwide basis.

Walking through the status of our fleet of nine EC225s, the two we had on lease in the North Sea received full payment on their leases throughout the suspension, and continue successfully to this day. This, we would contend, has served as an effective validation of one of the benefits of our leasing model. Here in the Gulf, all four aircraft are now generating revenue. But the impact of their suspension was significant.

These effects were felt not only this quarter, but also carry over somewhat into the fourth quarter, as well. Primarily we lost revenues from medium helicopters that were used to backfill for the suspended EC225 helicopters, and therefore were unavailable to start certain contracts as scheduled and/or were unavailable for ad hoc work. This was acutely the case for standby hurricane contracts, which we had to pass on because our 139s were unavailable. In addition, the high number of flight hours on medium helicopters being used to fill in for the suspended EC225s drove repairs and maintenance expenses higher.

In Brazil, where we have three EC225s on lease to Aeroleo, Petrobras only recently began making monthly payments again after they cleared these helicopters to return to service. Aeroleo did not receive any payments for those three aircraft from April 1 through late September and October, which has weakened Aeroleo's financial position and could adversely impact our results of operations. Although Petrobras has cleared the EC225 to return to service in Brazil, they have yet to begin flying the aircraft, which obviously impacts revenue flight hours for this quarter and next.

Our results are broken out by activity on slide 7. And our oil and gas segment currently represents about 75% of our business. And our operating revenues from that segment this quarter were over $60 million, representing a 20% increase from the prior year's quarter and 15% above last quarter. Most of that, over $45 million, came from our Gulf of Mexico operations, 12% above the prior year's quarterly results. Much of that improvement can be traced to increased deepwater activity, driving demand for our medium aircraft, and the corresponding increase in flight hours, as well as the addition of new search and rescue, or SAR, customers.

In Alaska, we had another particularly strong quarter, generating operating revenue of $14 million, a 39% increase over the prior year's quarter, and a 49% increase over the last quarter, due to increased activity with our oil and gas customers. Our international revenues of $1.2 million this quarter came from our contract in Uruguay, essentially unchanged from last quarter with just a slight decrease in flight hours.

As we have seen from the beginning of the year, demand continues to increase for our services as the number of deepwater drilling rigs and platforms, to which our medium and heavy aircraft are particularly well-suited, continues to grow. This is particularly true in the deepwater Gulf of Mexico, where the deepwater rig count is projected by some analysts to grow at a faster rate than any other area of the world by over 50% to 60 rigs by the end of 2015.

Let's turn to slide 8 to review our other business lines. Operating revenues this quarter from our leasing business decreased year over year to about $10.4 million. This was primarily due to some contract leases that have ended since the prior year's quarter and the timing of cash receipts from Aeroleo in Brazil. The 21% decrease from last quarter is due almost entirely to the timing of cash receipts from Aeroleo.

Revenues from Aeroleo and a customer in India continue to be recognized on a cash receipts basis due to liquidity issues experienced by both customers. Although the revenues of our air medical business fell by 25% relative to the prior year's quarter to $3.3 million due to the conclusion of three contracts, the impact to our EBITDA was negligible as these were very low-margin contracts. As we have discussed before, we have increased the financial return hurdle we now require when bidding newly air medical contracts to be more consistent with our oil and gas operations. Relative to second quarter, our revenues from air medical increased 5%.

Finally, our flightseeing was flat year over year, and up 57% over last quarter due to the seasonality of that business. Our FBO business saw this quarter's revenue decrease 3% and 4% relative to last year's quarter and the second quarter, respectively, due to lower average fuel prices and lower rebillables, respectively.

Turning to slide 9, you will find an updated table of Era's future capital commitments. We continue to have 10 189s on order, with options for another 10. And are encouraged by the dialog we are having with our current oil and gas customers, as well as our contract leasing customers about their interest in this aircraft. As a reminder, we are the launch customer in the US, and our first three are scheduled to arrive before the end of next year.

Furthermore, to address the increased demand we are seeing for the 139, which really showed off its capabilities globally during the suspension of the EC225, we exercised another one of our 139 options. Thus, we will still have the two aircraft scheduled for delivery before year end, and now have two arriving in the first half of 2014, further solidifying our status as the largest civilian operator of 139s. I would also point out that this additional 139 we just ordered is SAR provisioned. Meaning that it can serve in a standard transport role, if that's what the marketed dictates, or it could be outfitted to serve a SAR role, which we see as an important growth area for ERA.

With that, I will turn it over to Chris to go through a more detailed review of our financial results.

Thank you, Sten.

Looking at slide 11, Sten reviewed the primary factors driving the revenue increase earlier, and I will now provide a brief overview of the primary variances on the expense line items. Operating expenses were higher due to a $2 million one-time charge related to operating leases on certain helicopters configured for air medical services, which we expect to unwind before year end. In addition, personnel costs increased $1.6 million, primarily due to increased activity. Repairs and maintenance expenses were $1.2 million higher as result of the timing of repairs in 2013.

Administrative and general expenses were $0.7 million lower this quarter, primarily due to the recognition of bad debt expense in the prior year quarter due to the bankruptcy of a customer, which was partially offset by increased costs associated with being an independent public company. During the third quarter, we sold one S76 C++ helicopter and three S76 A++ helicopters, for total proceeds of $10 million, resulting in a gain of $2.6 million.

Adjusted EBITDAR increased 11% in the current quarter. If you exclude the impact of gains on asset dispositions, the increase in adjusted EBITDAR would have been 3%. The adjusted EBITDAR margin in the current quarter was 33% compared to 31% in the prior year. Excluding the impact of gains on asset sales, the adjusted EBITDAR margin in both the current quarter and the prior-year quarter would have been 30%.

Turning to slide 12, I will provide a brief overview of the primary expense variances between the third quarter and second quarter of this year. Operating expenses increased by 9% primarily due to the previously noted one-time charge related to operating leases on certain air medical helicopters. In addition, personnel costs increased $1.4 million due to additional headcount and overtime pay related to increased activity, higher health, life and disability costs based on claims during the period, and an additional calendar day in the third quarter.

Gains on asset dispositions in Q3 were $1.9 million lower than the gains recognized in Q2. Adjusted EBITDAR increased 10% from Q2. Excluding the impact of gains on asset sales in each period, Q3 adjusted EBITDA increased 21% from last quarter. The adjusted EBITDAR margin was 33% in both Q2 and Q3. Excluding the impact of gains on asset dispositions, the adjusted EBITDAR margin in the third quarter would have been 30%, compared to 27% in the second quarter.

Slide 13 provides an update on our current capitalization structure. As of September 30, we had an unrestricted cash balance of over $22 million, escrow deposits of $10 million, and total debt of $246 million. The escrow deposits are related to the sale of three of the S76 helicopters which closed this quarter, and are intended to be treated as tax-free like-kind exchanges under section 1031, with the proceeds held by a qualified intermediary. A qualified property has been identified to complete the like-kind exchanges in the first quarter of next year.

During Q3, we repaid $35 million of borrowings under our revolving credit facility, resulting in a drawn balance of $15 million. At quarter end, our total liquidity was approximately $200 million. Our total debt to adjusted EBITDA ratio was 2.6 times. Our interest coverage ratio was 5.5 times. Our total debt to total cap was 36%.

We believe our current cash balances, future cash flow from operations, and access to borrowings under our revolving credit facility will be sufficient to fund our current capital commitments. We see attractive opportunities to grow the business, and we plan to maintain the financial flexibility to capitalize on those opportunities, as they arise. Given the nature of our assets, we believe they can support more leverage than we currently have, and would be willing to incur more debt for the right opportunities. In the absence of compelling investment opportunities, free cash flow is intended to be used to repay debt and/or return capital to shareholders.

Slide 14 depicts Era's net asset value, which primarily consists of the fair market value of our helicopter fleet. There are two principal factors that contributed to the decline in NAV per share in the current quarter. Number one, this is the first period in which in-the-money stock options have had a dilutive effect, resulting in a higher dilutive share count, which accounted for approximately 70% of the variance in NAV per share.

Number two, an annual fair market value appraisal of our helicopter fleet was recently completed by Ascend, one of the well-known third-party appraisal firms in the helicopter industry. This appraisal attributed a lower market value to the EC225 helicopters given their recent suspension and lack of recent sales data points. And this change accounted for approximately 30% of the variance in our NAV per share.

As usual, we have shown that NAV per share both with, at $32.50 per share, and without, at $42.50 per share, the deferred tax liability, so that investors can make their own determination of how much, if any, the NAV calculation should be burdened by the current amount of this liability. Slide 17 in the appendix shows the calculations used to derive our NAV per share. I would remind you that this calculation only includes the helicopters that we own. It does not include any value for leased-in or managed helicopters that we operate.

With that, I will turn it back to Sten for closing remarks.

Thanks, Chris. Once again I want to thank everyone on the call for joining us this morning. And with that, I would like to go ahead and open the line up for questions. Operator, could you go ahead and open up the line, please.

(Operator Instructions)

Adam [Ritzer].

Could you talk a little bit more about what's going on in Brazil? It looked like you had about $16 million of deferred revs on the book. How do we rectify this and really getting it to a level that it should be?

Again, as we noted earlier about the timing with regard to the EC225 suspension and Petrobras' response to that, basically paying nothing, not only obviously not the flight hours but also nothing on the monthly going back to April. Obviously, as we've noted before, we disagree with their interpretation of that, and we are in discussions with them with regard to that. But to give Aeroleo breathing room, essentially, we extended the payment terms on our leases with them. As we did note, that they are now back to paying the monthlies. So, we are hopeful to a gradual return to normalcy in Brazil.

Again, we have our 139s operating, not only for Petrobras but have also begun to -- one of the things we are very pleased about is we have begun to develop a fair amount of non-Petrobras business with the likes of Repsol, Saipem and some other operators down there. And so, therefore, we are trying to diversify ourselves as much as you can. Obviously in Brazil you are limited. It is Brazil and it is Petrobras. But trying to develop some non-Petrobras business. The good news is that we are being paid at least the monthlies again. We have been expecting here any day now for them to go ahead and begin flying it again. But we are at least being paid the monthlies. So, it is going to be a gradual process, but certainly in a better spot now than we were even just a month ago.

Okay. And it's still -- I guess you don't want to predict when you might be at full normalcy?

Obviously some of that will depend on the resumption of flying, obviously, and the flight hours. And since I can't tell you exactly when that -- although, again, we expect it any day. That will obviously drive a lot of that because a decent portion of those contracts, in terms of when we originally priced the contracts, was to come from the flight hours. Not a majority of it, but certainly a meaningful portion of it.

Okay. What about the EC225 business? Is it possible to share with us how much lost revenue there was, even including having to run medium copters and lost revenue there? I think you know what I'm trying to get at.

Yes, I certainly understand. Some of that, frankly, obviously, is going to be a discussion that we are going to have with Eurocopter. But, again, I think really where you are getting hit -- and this is where it's difficult to quantify, is the fact that we've had numerous turndowns for requests for helicopters. Because, again, we had to make sure that all of our 139s that we had here in the Gulf stayed here to make sure -- and our C++s, for instance, and, frankly, we're even using our A++s to support the clients here in the Gulf, who had to 225s under contract.

These were aircraft that we received numerous requests from, either for ad hoc work or leases elsewhere in the world, and we had to keep turning them down. And the real question becomes, after you keep turning people down and saying -- until the 225 situation is rectified we can't help you -- you wonder how many calls you didn't get because if you call someone three times and they say no three times, you probably stop calling. So, that one is a little bit more difficult to quantify.

Where we really saw it, as I mentioned, quite acutely just this past quarter, was we have a client that we do hurricane standby work for. Last year we had three of our 139s being paid a standing charge to be available for hurricane work. And when that same client approached us this year, we had to turn them down, and could only provide one 139, and only for about a month, where normally we have 3 or 4 months of the standby work. So that definitely hit us.

As you can see in our results from the previous quarter to this one, you can see even just the partial return had a pretty meaningful impact. I think you saw about a 20%-plus increase in our EBITDA when you exclude asset dispositions from one quarter over the next. So, you can see even just a slight return of the aircraft. And when I say slight return, we had those four aircraft, one which began essentially August 1, one which essentially began the middle of August, one the beginning of September, and then the last one only just, frankly, in the last 3 to 4 weeks, October 19. So, even with that piece of it being included, you can see the impact from one quarter to the next. Frankly, we are trying to put pencil to paper, as you can imagine, as part of our conversations with Eurocopter. So, forgive me if I'm a little vague on putting a specific number on it.

Okay. I understand. What about pricing? Have you seen the ability to increase pricing on contracts recently?

That continues. We've been seeing it really steadily throughout the year, I think, certainly beginning toward the end of first quarter. There continues to be a tightness in the market for the medium and heavy aircraft. What we are encouraged, what we've seen so far, is the 225. As soon as they came back available here in the Gulf, where we've got the four, they were snapped up immediately and returned to service with the clients. In fact, even another client taking that fourth, which had come back from the North Sea off of lease. So, we are very encouraged by that.

And we continue to see demand coming. As I noted before, the increase in deepwater rigs coming to the Gulf is expected to grow to as many as 60 rigs by the end of 2015. That is an excellent bellwether, obviously, not only for the business but those rigs themselves demand. However, most importantly, it's a bellwether for future business for us because, ideally, those rigs find oil and gas and then it moves into the production phase, and that's really where, again, most of our business is oriented. So, therefore, we see that as a harbinger of long-term opportunity, not just the immediate opportunity to service those rigs.

How many rigs are currently operating?

It depends on what you defined as, quote, a deepwater rig. If you just include all floaters -- and that's the most gratuitous description -- it's currently at about 40 rigs. Although, I would argue some of those rigs technically are semi-submersible but they're not really capable for true deepwater work. But if you conservatively define it as all floaters, then you are looking at about 40 rigs currently.

Okay. So there's at least 50% increase coming over the next 2 years.

That's correct. And, again, what's nice about the deepwater, if you will, is that these are projects that are very, very large, very, very expensive for the upstream companies. And as a consequence, as you might expect, the players that play in that area are very large, well-capitalized companies. These are very long-term projects that are planned years in advance. So, to use a supertanker analogy, they take a while to get going to move forward, but they don't turn or stop quickly going forward.

For instance, some of the stuff you might see on the shelf, which is maybe marginal, smaller players, less capitalized, if oil prices go up or down they may defer and they may cancel them on relatively short notice. These tend to be large, long-term projects which you see coming from a distance, and tend to often arrive versus being canceled or deferred.

Got it. Last question and I'll stop. The air medical business, why just not get out of it? It's $3 million in revenues on $80 million or so in the quarter. Isn't it becoming just kind of an annoyance?

Believe me, we've evaluated this. Just to give you a snapshot of it, unlike other businesses, for instance, where you've got a lot of infrastructure, you've got a lot of people, it requires a lot of management time, this is a business that, by and large, the hospitals own the aircraft, they provide the facilities. And, really, all you are providing is pilots and mechanics. There's really not a lot of other time required or infrastructure required from our side. So, look, I wouldn't call it a free option, but as you go through and say -- look, and this, frankly, gave us the courage, if you will, to be able to go back and push back on the pricing. And say -- look, if you want to have the kind of helicopters we provide, which is to have twin-engine aircraft, fully equipped with the latest safety avionics, et cetera -- which is the way we run our business.

You can't run a business one way for oil and gas and run it differently for air medical. Obviously, there's going to be some hospital systems that just aren't equipped to pay for that. And, as much as they'd love to have the safety, they just don't have the ability or the desire to pay for it. But we believe there is a segment of that business that does value that and therefore will pay for it. And that is the segment we will look at. But if it isn't there, then it's very easy to just, as the contracts roll off, to just ramp it down. But we believe it is there. We will pursue it. And it is because it is -- again, I don't want to say a free option but it doesn't really require much from us in terms of time, investment, infrastructure, et cetera.

Right. Okay. Thanks very much, guys.

DeForest Hinman.

Can you give a little bit more color on this OGX bankruptcy and how that impacts the Brazil JV? Is that a situation where, if there's outstanding receivables, there were general creditors in the Brazilian bankruptcy? I'm not real familiar with how bankruptcies work in Brazil. So, if you could give me any color, it would be very helpful.

Right. We had been working closely with OGX. Obviously, this is not something that caught everyone by surprise overnight. Certainly the signs were on the horizon. So, we were actively managing that and working with OGX on their needs. And we had originally had two aircraft working for them. As their needs decreased, and, frankly, we had another opportunity to place an aircraft on another contract with another customer, we worked with them to actually transition the two aircraft contract down to one. So, therefore, we then reduced our exposure there.

We, at the moment, are still current with them. One of the benefits of being where we are in the chain, if you will, there are certain services which a company can delay or push off for periods of time in periods of financial stress. However, the assets that are actually producing cash flow for the company, you have to be able to get people back and forth to them. So, we thankfully stand in a good position to be able to get paid and, knock wood, thus are being paid and are currently current with OGX. But, as you might image, it's certainly something that we are monitoring closely.

Okay. That's very helpful. On the maintenance line, I think a lot of us are still learning a lot about the legacy financials of the company, as they are getting more transparent as the quarters roll on. But can you give some more color around the repair and maintenance line in the context of the EC225s in terms of the maintenance crews? Were any of those employees furloughed? Can they work on other helicopters? So in terms of -- is there a change in what we should be expecting on that expense line going forward, now that they are flying more actively?

Thanks for the question. I would say that we did not furlough or let go any maintenance workers. In fact, everyone was kept quite busy in the Gulf of Mexico because we were working extra time to keep the medium helicopters -- which were flying a lot of hours to backfill for the EC225s, in good working order. So, our second quarter R&M expense, which we talked about last quarter, was impacted due to higher expenses related to some overtime in keeping those, 139s primarily, in service.

This quarter we did have an impact, as well. Of the $15.1 million in total repairs and maintenance expenses in this quarter, approximately $1.7 million of that amount was related to aircraft that were in major overhauls, which included three of the 139s. I would note that in Sten's prepared comments during the call, he referenced the fact that there would be an ongoing impact of the EC225 suspension even in the fourth quarter. A good part of that is related to the repairs and maintenance expenses that will be associated with completing some of these major overhauls on those medium aircraft that did incur a lot of flight hours during the EC225 suspension period.

So, essentially, for instances, you -- what happens is, not unlike, for instance, a car, where you reach a certain number of miles and you take it in and you get a more extensive checkup, if you will. For instance, with the 139s, for instance, 1,200 hours is a major point. And, obviously, you will get to that point -- we would have gotten to that point at some point in the future here. But originally you expected it sometime in 2014. Given the tremendous use of the 139s to backfill for the 225s, essentially it got accelerated.

So, it's not necessarily an incremental, it's more of just bringing forward expenses that, frankly, we thought we would be facing a little bit later on. And so that's why this condensing of some of the expenses -- that's how it ended up showing up in this quarter as increased numbers.

Okay. That's helpful. Then just last question on the fuel expenses. How do we take the fuel expense into account? Is that something that's passed through to the customer? Or is that some sort of delay, [buy] versus expense when we fly the helicopters?

The vast majority of our fuel costs are passed through to the end customers. We do have a modest amount of exposure to fuel prices. But I would note that one of the benefits of having our FBO business in Alaska, where we actually make money by selling fuel primarily, is that we have a natural hedge in the business to offset the minimal amount of fuel price exposure we do have in our operating business elsewhere. So, the vast majority of that expense is passed through to our end customers.

Okay. Great. Thank you.

(Operator Instructions)

Kathryn O'Connor.

In an effort to put the EC225 discussion to rest, could I just tell you what I ticked off as the effects of it in your financials and you can tell me if I'm missing anything major. But I think what I heard you say on the revenue side was that you have four Gulf of Mexico EC225s that all had partial quarters. Three out of four had partial quarters in Q3 and one only started in Q4. You have three in Brazil, where you are starting to see the fixed portion come on in Q4. And then you would likely see the variable hour portion come on at the beginning of, say, 2014.

In the next year, it looks like you would have -- next year in hurricane season -- you could get back at least $3 million of missed work that you suffered this year. And then on the expense side, there's $1 million to $2 million worth of overtime costs that you have had, say, in the last couple of quarters that should reverse itself. And then on top of that, also on the expense side, you have some expenses that you are dealing with in terms of major overhauls of 139s that got pulled forward that we should start to see drift off somewhere in 2014. Are those all the things?

I think that's all reasonably pretty spot on. I think, ideally, it's not January before they start flying in Brazil. But if you want to be conservative, I suppose you can approach that. Again, we don't have control over it. Not frankly entirely sure what they are waiting for because they have approved them for flight. And, in fact, Eurocopter had taken the entire Petrobras management team on a tour of their facilities down there, et cetera, and they all flew on a 225. Anyway, hopefully, that will be the case.

On hurricane standby, there's two pieces to the component relative to last year. First of all, obviously there is the monthly standby charge, which, of course, that is definitely something you can quantify and say -- last year we were paid it and this year we weren't. The other aspect was last year, you may recall, was a very active hurricane season within the Gulf. There were a number of named storms. Again, they don't have to be hurricanes, per se, but essentially, if they are named storms then you will have people move folks on and off. And, like all the rest of our contracts, not only do you have a standing charge, but you also have charges related to actual flight hours, moving people off and then after the storm passes moving people back on.

And we had a very active storm season last year. We had a very quiet one this year. There's obviously no telling what it will be next year. So, not sure whether three is the right number, if it will be more or less, to tell you the truth. It sounds sort of grim to talk about that as something that's a business opportunity, but it is what it is. And, again, we are impacted by the activity of the storm season in the Gulf. But, otherwise, I think you are certainly capturing most of it.

Great. And then you guys spoke of bit about Alaska, and there seemed to be a pretty significant increase there. Just because I think it's a little bit less clear to us, sometimes, sitting here, what exactly is happening in the Alaskan oil and gas space, can you just give us what you might know from serving that market and how you expect that to continue?

Sure. We had a pretty active period earlier in the year. Also, frankly, assisting Shell when the Kulluk ran aground. So there was some activity there. But, by and large, what we are seeing is we are certainly active down in the Cook Inlet. But really where the largest portion of our revenues come from is up on the North Slope. In speaking with our clients, obviously this is an area which has some political sensitivities. You've seen people talk about Arctic exploration and so forth, and some of the pushback on that. I think you may have seen a recent article about Shell that they're again, making a push there in the Arctic. That is an area where the distances involved, that's where you will see more of our medium aircraft. And that's, frankly, where most of our revenues are getting generated from there in Alaska.

Given the conditions, we've been operating longer than anyone in the country up in Alaska, since 1948. And we have aircraft that are particularly suited. We've got, with the Phipps blades, the de-icing blades, that we have on the 139s. And again, just the cadre of pilots we have and the experience we have flying in those conditions gives us very strong competitive advantage up there. We've also seen -- I'm blanking on the name in terms of the LNG pipeline that's being discussed to have the endpoint there, actually down in the Cook Inlet. So, we do a fair amount of pipeline inspection work. We believe we will be seeing more. But, again, the North Slope looks quite promising in terms of additional work coming up there in the long term.

Great. And I guess you have some special modifications for the AW139s that you are using up there. Is there any plan to bring more up there and to set some for work up there? Or do you have enough already there to handle any work?

We think we have enough up there now. There are, potentially some search and rescue opportunities up on the North Slope that we are evaluating, which would require additional aircraft, particularly large aircraft. Whether those are 225s, again, ice class aircraft, which we do have some in our fleet. Whether those are 225s, 92s, or even 189s, depending on the start date of that contract that we are evaluating.

Kathryn, this is Chris here. One thing I would note about Alaska is, from a size standpoint, it is a much smaller overall market than the Gulf of Mexico. So, you will see more impact, both up and down, from single company drilling and exploration spending. We benefited from that this year because the clients whom we serve up their increased their activity. But I just wanted to flag that as, given the relative size of the market, individual customers do have a large proportionate influence on the results there.

Yes, I guess if you looked at doing a search and rescue contract there, though, I assume that, that would be more of a multi-year type -- wouldn't that be more of a multi-year type contract that would end up giving you a good base and probably with a -- would that be with a producer or with a government agency?

There's a little bit of both up there, actually, in terms of -- I'm sorry, you are referring to the SAR opportunity that I mentioned?

Yes.

It's a little bit of both. You have the operators up there, but then there is also essentially a government agency that manages the area up there on the North Slope. So it Is a bit of both.

Okay, great. And then just a cleanup item. The air medical expense, was that the expense to have one of your helicopters switch so that it could be used for SAR and other purposes? Was that the expense? Or something different -- the one-time expense, the $2 million?

It is something different. We lease-in seven helicopters for our air medical operations. Those are currently in contract and servicing clients. Four of those are currently on contract and servicing clients. We have three that have not been working. In the past, we always evaluated those as a group of assets together. Given the developments in that business, recently, we took the approach of evaluating each asset separately.

And it was determined that the fair market value for those three helicopters in question was less than what we could buy the lease out for today -- what it would cost us to continue to make those lease payments. So we went ahead and recognized a one-time charge this quarter of $2 million, which reflects the difference in those values. I think you will see us, as we indicated in some of our materials, unwind those leases related to those helicopters before the end of the year.

Kathryn, these were all leases that were on those aircraft when that air medical business was purchased back in 2007.

Okay. So, legacy. Then just one bigger-picture question. You guys obviously spoke at the end of the call about your desire, you are always looking for different strategic opportunities and your willingness to look at those when those come along and to lever up. Can you just remind us how comfortable you feel in terms of -- your leverage has come down since the time you did your bond deal, so can you just tell us how high you think leverage could go in any transaction? What's a more normal rate versus where we are, which I think is on the low end?

And then just the types of opportunities you are seeing. Are you feeling like it's going to be more of an international operations expansion led by existing customers? Or do you think there's more M&A type opportunities? Can you just give us some color where you would be looking geographically, as well?

Sure. I will comment first on the overall leverage levels and then turn it over to Sten to discuss the opportunity set. As you'll recall when we did the senior notes offering last December, our leverage was more in the low- to mid-3 times debt to EBITDA range. We have given the free cash flow we've generated this year, paid down a good amount of that debt through the course of the year. So, now, we stand more in the mid-2 times range. We certainly felt comfortable at the range that we were at when the bond offering was completed, in that low- to mid-3 times range. And we would feel comfortable operating at even higher leverage levels than that, even north of 4 times, for the right opportunity, with the knowledge that the Company does generate a substantial amount of free cash flow absent growth CapEx, and therefore we would be able to pay that debt down over time.

In terms of the opportunity set, I guess the answer is a little bit of all of the above. You've seen our order book, the large number of orders that we have for the 189s. We also have orders for the 169s. And then, again, additional options for 139s. So, we will continue to move on that. We are also evaluating additional classes of aircraft. I think certainly the overall business model for us is to grow, not only internationally, but also to grow the fleet. Certainly, just on the same way -- the example I always use, the same way some people are Ford people and some people are Chevy people, and there's no way you can convince either one that the other one is wrong or right. That same thing -- that you have with some classes of aircraft. Some people are determined that the S92 is the best, and some it's the 225.

So, not only in addressing customer needs, but also, frankly, just diversification of risk, as we've seen with the 225 there, and even the S92 had its turn a few years ago with some issues, that you are better off diversifying yourself across aircraft classes. Obviously, it's a balancing act. You don't want to be too diverse. Certainly you have to have a certain number of aircraft in order to have a critical mass to be able to justify having all the different pilots qualified for that aircraft, and the parts and spares and so forth. But it's definitely something that, in addition to the order book that are -- those are firm, that we are evaluating other opportunities there.

On the M&A front, as you know, it's definitely you have to catch the person at the right time. You have to have an alignment of the stars to have things work out. It's not for lack of trying. We are certainly out there looking. Hopefully, if the opportunities present themselves and the stars align, then we will be in a position to do something. But the answer is that but we are pursuing all avenues simultaneously.

That's very helpful. I just wonder, when you are talking about possibly moving into different classes of aircraft, would that be part of an overall strategy to expand internationally? You had announced maybe different -- bringing on some different -- (multiple speakers).

Yes. But I would say the international is not the only piece of it. Obviously, again, noting the tremendous growth we see coming in the Gulf. And there are a number of customers in the Gulf that, frankly, we don't access now or certainly don't access as much as we could, simply because they have a preference for a particular type of aircraft that we don't currently have. And this is all on the medium and heavy side.

Okay. Perfect. Thank you very much.

There are no further questions at this time. I turn the call back over to the presenters.

Great. Again, thanks, everybody, for joining. Hopefully, as Kathryn noted, that maybe hopefully we will finally have these EC225 issues to bed, and we won't have to spend as much time talking about it. Again, there will be some impact on the fourth quarter. But, hopefully, knock wood, we've turned the corner there and look forward to speaking with you all next quarter.

This concludes today's conference call. You may now disconnect.