FTAI Infrastructure - Q2 2023

Transcript

Operator (participant)

Good morning, and thank you for standing by. Welcome to the second quarter 2023 FTAI Infrastructure Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Andreini, Head of Investor Relations. Please go ahead.

Alan Andreini (Head of Investor Relations)

Thank you, Michelle. I would like to welcome you all to the FTAI Infrastructure 2nd quarter 2023 earnings call. Joining me here today are Ken Nicholson, the CEO of FTAI Infrastructure, and Scott Christopher, the company's CFO. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including Adjusted EBITDA.

The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Ken, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements, and to review the risk factors contained in our quarterly report filed with the SEC. I would like to turn the call over to Ken.

Ken Nicholson (CEO)

Thank you, Alan, and good morning, everyone. This morning, we'll be discussing our second quarter financial results and also providing an update on the latest developments at each of our business segments. For this call, I'll be referring to the second quarter supplemental materials recently posted to our website. Before we get to the financials, I'm pleased to report that we will be paying our fourth dividend as a standalone company, with our board authorizing a $0.03 per share quarterly dividend to be paid on August 15th to the holders of record on August 8th. On to the financial results. Adjusted EBITDA for the second quarter came in at $36.2 million prior to corporate expenses, up 20% sequentially from $30.1 million in the first quarter of 2023, and representing a record result for our company.

Three of our four business segments posted growth quarter-over-quarter, while our Long Ridge Power and Gas business continued to generate double-digit EBITDA, just slightly softer than Q1, as lower gas prices meant we slowed down sales of gas into the third-party market. More importantly, during the quarter, we made good progress on a number of new initiatives and growth projects. We expect to continue to experience growth in the second half of 2023 and the years ahead. Based on these initiatives, we continue to target reaching a run rate of $200 million of annual Adjusted EBITDA from our segments by the end of 2023, with no additional capital required to meet that target.

In terms of the highlights at each segment, Transtar had a great quarter, with Adjusted EBITDA coming in at $20.3 million, up 18% from Q1 of this year. At Jefferson, while Adjusted EBITDA for the quarter was also a new record, we're even more excited about a number of new business wins we secured during Q2 and are confident we will begin to post double-digit EBITDA in Q3 and beyond. At Repauno, while the financial results reflect an Adjusted EBITDA loss, this loss was largely a result of the startup of operations under our new multiyear tolling contract experienced in the early parts of the quarter. We're entering Q3 now generating positive Adjusted EBITDA. Finally, at Long Ridge, normal operations continued, and we reported $10.4 million of Adjusted EBITDA. All in, a very strong quarter, setting the stage for continued growth.

Briefly on the balance sheet. We ended the quarter with $42.5 million of cash. In the aggregate, we had $1.3 billion of debt shown on the balance sheet of June 30. Shortly after the quarter end, in July, we issued $100 million of additional debt through an add-on to our existing senior secured notes. Proceeds from the issuance were used to repay approximately $75 million of existing debt, including our $50 million revolver at Transtar. Pro forma for the issuance, total debt on our balance sheet increased only slightly by $25 million from the June 30 balances that are reflected in the earnings supplement and in our 10-Q. Importantly, Transtar is now completely debt-free, meaning all cash generated at the business can be distributed up to FIP with no limits or restrictions.

I'll spend a few minutes providing more details on each of our segments and then plan to turn it over for questions. I'll start with Transtar on Slide 7 of the supplement. Transtar posted revenue of $42.5 million and Adjusted EBITDA of $20.3 million in Q2, up from revenue of $41 million and Adjusted EBITDA of $17.2 million in Q1. Both carload volumes and average rate per carload were higher for the quarter, as U.S. Steel production at the Gary, Indiana, and Pittsburgh, Pennsylvania, facilities continued at normal levels. Away from U.S. Steel, we also continued to make very good progress on multiple initiatives at Transtar to drive incremental third-party revenue and EBITDA. We expect these programs to represent approximately $30 million of incremental EBITDA opportunities annually with no additional investment. On to Jefferson.

Jefferson generated $17.1 million of revenue and $7.1 million of Adjusted EBITDA in Q2, compared to $19.1 million of revenue and $6.5 million of EBITDA in Q1. I'll take a minute to discuss the makeup of the P&L for the quarter, which showed a shift to increased volumes of refined products versus crude oil. Transloading rates for refined products are typically lower on a per barrel basis for Jefferson, given that the process involves no heating or blending as crude often does. Refined products can also generate a higher margin since the operating costs associated with refined products are quite low. For Q2, you'll see we posted lower revenue due to this dynamic, but continued the pace of EBITDA due to lower operating expenses.

At the end of the second quarter, we completed commissioning and started operations at our new ship dock, which doubles Jefferson's ship handling capacity and represents the final component of Jefferson's full build-out at the main terminal. The new ship dock clears the path for our refinery customers to now fully utilize Jefferson's storage and transloading capabilities. We expect substantial increases in volumes entering the second half of the year. On the new business front, we recently secured two new contracts at Jefferson. The first, which is at the main terminal, involves the handling of storage, handling and storage of naphtha for a large trading firm. That commences immediately and should more than offset the reduced crude oil volumes we saw during Q2.

The second contract, which is materially more meaningful, is at our newly acquired Jefferson South site, where we secured a new 15-year contract for the transloading and export of hydrogen-based clean fuels commencing in 2025. Together, these two contracts are expected to generate in excess of $10 million of annual EBITDA and potentially materially more. We expect to enter into additional contracts for the handling of clean fuels in the coming months, as new developments in the Beaumont market have been accelerating, generating new demand in an environment where supply of available logistics terminals is very scarce. Moving to Repauno, we commenced our multiyear contract to transload natural gas liquids using our Phase I system in Q2. The contract with one of the world's leading trading companies, has minimum volume commitments and does not expose Repauno to commodity prices.

We did experience some initial startup costs that resulted in small Adjusted EBITDA loss in Q2, but as I mentioned, those should be behind us, and we're generating positive EBITDA going forward. With Phase I having commenced, Repauno is now focused on securing business for our larger Phase II transloading system. As detailed on Slide 9 of the supplement, our Phase II system is expected to materially increase our storage and throughput capacity when it comes online in two years. In the aggregate, we expect Phase II to cost approximately $200 million to build and to generate in excess of $40 million of annual EBITDA once complete. We have demand for multiple international off-takers, and our goal is to enter into long-term agreements with multiple parties in the coming months. Finally, moving on to Long Ridge.

Long Ridge generated $10.4 million in EBITDA in Q2 versus $11.3 million in Q1. Power plant operations were steady, while gas production was managed down during the quarter in the currently low, lower gas pricing environment. At gas prices of under $1.50 per MMBtu, our profit on third-party sales is less impactful, so we have deliberately limited production to volumes needed solely to fuel the power plant and opted to keep excess gas in the ground in anticipation of higher gas prices, which are typical as we enter the fall and early winter. At Long Ridge, we continue to progress a number of initiatives. In the near term, we're expecting final approvals in the coming months for the upgrade of the power plant to 505 MW, an increase of 20 MW from our current generation capacity.

That will contribute incremental EBITDA in the range of $5 million-$10 million annually, based upon current forward curves for the price of power. Over the longer term, we are seeing increased interest from behind-the-meter customers, including data center developers and companies focused on energy transition opportunities. To wrap up, we're pleased with our first half of 2023 and excited about the things to come in the next half of the year. With that, let me turn the call back to Alan.

Alan Andreini (Head of Investor Relations)

Thank you, Ken. Michelle, you may now open the call to Q&A.

Operator (participant)

As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while I compile the Q&A roster. Our first question comes from Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna (Managing Director)

Good morning. Thanks for taking my questions. Starting off, I think just from a high level, you know, sequentially, you know, on a quarter basis, consolidated EBITDA was up 26%. I'm curious if you're expecting similar increases in 3Q and 4Q or throughout the balance of 2023?

Ken Nicholson (CEO)

Yes, we are. Yeah, as our businesses continue to ramp up. Thanks, Giuliano, by the way. We are expecting to maintain, you know, 20% EBITDA growth from the segments and, you know, closer to 25% after corporate expense. I think the only, the only, you know, potential blip in that is from time to time, we have scheduled maintenance at the Long Ridge Power Plant. That may, you know, that may affect a month's worth of cash flow out of Long Ridge in any particular quarter, depending upon when that month falls. I do think we have a scheduled maintenance event coming up later this year. Whether that falls in the month of September or the month of October will ultimately drive, you know, what Long Ridge ends up doing in that particular quarter. Outside of that, yes, that's the pace of growth we're anticipating to continue.

Giuliano Bologna (Managing Director)

That's great. Kind of going on an asset-by-asset basis, starting off with Transtar. I'm curious if there's any third-party EBITDA contribution in the $20.3 million that you reported in the second quarter?

Ken Nicholson (CEO)

Yeah, I'd say about directionally, about 10% of that EBITDA is attributable to third parties. You know, obviously, our goal is, you know, to continue to increase that and diversify the revenue stream. I think we've got a lot of things going on that are gonna enable us to do that as we've been entering the second half of the year and turn into next year. I'm excited about it. I think there are a number of different initiatives that will drive EBITDA growth and also diversify the EBITDA.

Giuliano Bologna (Managing Director)

That sounds good. Next time, you know, can you go into a little bit more detail around the $30 million of incremental EBITDA at Transtar and the timing around when it might start to flow through, or I guess part of it starting to flow through, but, you know, the balance of the $30 million?

Ken Nicholson (CEO)

Yeah, yeah. The vast majority is, you know, attributable to third-party business. We have a number of new developments coming online in the coming months. Very large rail car repair and maintenance facility in Pittsburgh, which is progressing really nicely. I was in Pittsburgh just about a month ago and saw the progress. That's gonna be a big deal for the Union Railroad, Transtar's Union Railroad in Pittsburgh. We have a new transload facility. We're tripling the size of the transload facility in the Detroit area, that's coming along great. I would say of the $30 million, it's safe to say $15 million-$20 million is in a very, very good place.

It's, you know, I wouldn't say it's entirely, you know, 100% in the bag, but it's coming along very well. I'm highly confident in $15 million-$20 million of the $30 million. I think the remaining $10 million or so is for, you know, us and the Transtar management team to go get. I think that's very achievable given the assets that we have and all the activity around us. Feel very good about where Transtar is today. We had a very good second quarter. I think we'll continue to have, you know, strong third and fourth quarters and slowly chip away at, you know, that $30 million in the couple quarters ahead.

Giuliano Bologna (Managing Director)

That's great. For a slightly different, you know, I'm curious, what you think the ultimate potential is for Transtar over time?

Ken Nicholson (CEO)

Well, I mean, the potential could be, you know, significant with acquisitions and additional investment. Without additional investment, given the capacity, you know, and the leverageability of the existing rail systems, I'd say it's ±$150 million EBITDA. I think the potential for the assets in place over the next, you know, couple of years, two to three years, with no material incremental investment, it probably reaches, you know, about $150 million of EBITDA. That's our longer-term, you know, project for the collection of railroads at Transtar. Obviously, you know, the goal is to exceed that with, you know, new investments and, you know, we're always looking at new opportunities. I think over the next two to three years, you know, our longer-term plan is to hit a 150 number, ±.

Giuliano Bologna (Managing Director)

That's great. Thank you. Shifting over to Jefferson, where do you see the near-term growth in EBITDA coming from, that will get you to that $10 million+ you know, or $10 million or greater quarterly EBITDA run rate starting in the third quarter?

Ken Nicholson (CEO)

I really think we're largely there as we're now, you know, almost one month, you know, into the third quarter, in terms of the double-digit EBITDA. I think the biggest development. Obviously, we have a couple of new contracts that are super. One is commencing immediately, that's gonna have an immediate impact. Really, from an infrastructure standpoint, it was the completion of the second ship dock. Remember, at Jefferson, we now have three docks, dock space for energy terminals is, it's like the front door to the house. You know, you can only manage so much volume, if you have constraints at your docks. We completed dock two. We had been operating with dock one and dock three.

We completed dock two at the end of June, and so that was the bottleneck to the entire 6 million bbl, you know, logistical system. Now that that is operating, I think that's gonna be a big, sort of, contributor to additional volume and additional EBITDA growth. I think it's gonna come from refined products, primarily. I think crude oil is, you know, continuing to come out of the Uinta Basin, and we'll continue to see a steady flow of Uinta Basin crudes. Canadian crudes tend to be more volatile. I think the real growth over the next three to six months for Jefferson, as we, you know, start to post double-digit EBITDA, will really be through the refined products, which again, will be lower revenue as we saw in the second quarter, but, you know, higher EBITDA.

Giuliano Bologna (Managing Director)

Yeah, that sounds good. You know, related to the new 15-year contract, at the Jefferson South project, can you tell me a little more about the, you know, the CapEx for that project and also kind of the EBITDA contribution around that?

Ken Nicholson (CEO)

I mean, we're particularly excited about that contract. That is really the first major hydrogen-based fuel transloading contract that I'm aware of in the entire Beaumont, Port Arthur market, and, you know, we secured the business. It is at our Jefferson South terminal, which is a different piece of land located across the river. That was, if you recall, a terminal we purchased last year, and we have been developing, and there's a lot to do. I very much believe that this first contract is the first of many that will be particularly focused on clean fuels. When we purchased that site, it had an existing dock. In order to handle this contract, that dock needs to be refurbished.

We estimate that will be between $30 million and $40 million of expenditure, that will be required to refurbish the dock in order to start the business. It's not terribly significant, and the economic returns are very compelling, particularly given it's a 15-year contract. By the way, that contract is not just long term, but it also contains minimum volume commitments from the counterparty, 15 years, minimum volumes, locking in, you know, what will ultimately become double-digit EBITDA on a $30 million to $40 million investment is something we really like.

Giuliano Bologna (Managing Director)

That's great. Shifting over to Repauno. How close are you to getting approval on the caverns? Also, you know, how close are you to securing new contracts to reach FID for Phase II?

Ken Nicholson (CEO)

Those two projects that you just mentioned are now really our sole priority at Repauno. At some point over the next three months, I think we'll have the permits in hand for the caverns, and I think we'll have contracts in place for Phase II. We're very close. It's very active engagement with the permitting agencies and counterparties. Would've liked to have had it all done by now, but, you know, we don't control the timing of these things, very close. Our goal is to have this stuff all done in the next three months.

Giuliano Bologna (Managing Director)

Sounds good. Then thinking about the power plant at Long Ridge, you know, obviously, gas sales are the primary source of volatility there in the quarter, and, you know, I'd be curious, at what price do you see what price would you need to see natural gas before turning on gas sales again?

Ken Nicholson (CEO)

Yeah, I mean, our, you know, underlying prices today are anywhere from $1.30-$1.50 in MMBtu. Those are market prices in our region. We produce gas ourselves at slightly less than that. Theoretically, it would be profitable to produce excess gas and sell into the third-party market. It just wouldn't be much in the way of profits. We sort of, you know, have made the decision that in this environment, you know, we will produce less and bank the gas in the ground, knowing that, you know, it is highly likely in the late fall and early winter, that gas prices will go up.

Of course, no one really knows precisely what will happen to gas prices. I would tell you know, generally, we would target roughly $2 in MMBtu, maybe a little bit less. You know, prices creep up to $1.80, $1.90, $2, I think we'd start turning back on gas production. North of $2, for sure, we would start producing excess gas again and selling into the market.

Giuliano Bologna (Managing Director)

Perfect. Thinking about more of a general question, I'd be curious if you can build the $50 million quarter or $200 million run rate quarter by components to provide a sense of where the growth contribution needs to come from to get to that $200 million run rate that you're targeting, you know, by the end of 2023?

Ken Nicholson (CEO)

Sure. Yeah. Maybe I'll just go through it, you know, for each of the four segments and then, you know, deduct some corporate expense and add it up that way. I mean, Transtar, you know, I really think in the next two quarters, should be running at $25 million of EBITDA. Certainly as we swing into next year, out of 2023 and into 2024, we should be pushing up against $25 million of EBITDA. That's the number at Transtar. Jefferson, high teens. You know, call it $17 million-$18 million at Jefferson at the end of Q4. Feel pretty comfortable with that target. Repauno, you know, will continue to be small until Phase II kicks in.

Repauno will be $2 million-$3 million of EBITDA, and Long Ridge should continue to be steady and producing EBITDA of about $12 million for us. Add all that up, deduct, you know, what will probably then, at the end of the year, be closer to $7 million of corporate expense, maybe $8. Add up the, I think I said 25, you know, 18, three-ish, 12, and deduct $8, and you should get pretty close to the 50.

Giuliano Bologna (Managing Director)

That's great. Thanks for that. You know, one last one. I'm curious to know what the current M&A environment looks like for you guys.

Ken Nicholson (CEO)

Yeah, we. It's a great question. We're definitely seeing increased activity. Obviously, we're going to continue to be very disciplined, but I do feel like with the momentum at Transtar and our terminals businesses really maturing and the teams of professionals we put in place, both at the railroad and at the terminals business, we are a very capable buyer of additional businesses and assets in those two spaces. You know, yeah, we're reviewing a lot. I would say, you know, it's been now 12 months that FIP has been an independent public company, we are definitely as busy as we have been in that 12-month period looking at investment opportunities. I.

You know, I'm hopeful we'll see something, you know, in the next, you know, few quarters based on all this activity, but you never know. As I said, we'll continue to be very disciplined. I definitely think the M&A market, which was admittedly quite slow, late last year and into early this year, has been coming back, and we're seeing more and more opportunities for sure.

Giuliano Bologna (Managing Director)

That's great. I really appreciate the time and answering all my questions. I'll jump back on the queue. Thank you.

Ken Nicholson (CEO)

Thanks.

Operator (participant)

I show no further questions. At this time, I would now like to turn the call back to Alan for closing remarks.

Alan Andreini (Head of Investor Relations)

Thank you. Thank you, Michelle, and thank you all for participating in today's call. We look forward to updating you after Q3.

Operator (participant)

This concludes today's conference call. Thank you for participating. You may now disconnect.