FTAI Infrastructure - Q3 2023

Transcript

Operator (participant)

Good day, and welcome to the Q3 2023 FTAI Infrastructure Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the call over to Alan Andreini, Investor Relations. You may begin.

Alan Andreini (Head of Investor Relations)

Thank you, Michelle. I would like to welcome you all to the FTAI Infrastructure third 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 press release on our website, which we encourage you to download if you have not already done so. Also, 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. Now, I would like to turn the call over to Ken.

Ken Nicholson (CEO)

Thank you very much, Alan, and good morning, everyone. This morning, we'll be discussing our third 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 third quarter supplemental materials recently posted to our website. To kick things off, I'm pleased to report that our board has authorized a $0.03 per share quarterly dividend to be paid on November sixteenth, to the holders of record on November ninth. On to the financial results.

Adjusted EBITDA prior to corporate expenses came in at $32.2 million for the quarter and $98.8 million for the nine months year to date. Our year-to-date results are up 25% versus last year, with each of our four segments demonstrating growth. Reflecting on the results, while the headline third quarter numbers may not show it, I believe this was our most productive quarter since the spin-off of our business in August of last year, and our accomplishments during the quarter as it relates to new executed contracts set the stage for a strong fourth quarter and 2024 year ahead.

At each of our segments, we continued to advance a number of growth initiatives, and more importantly, executed a number of long-term contracts, several of which have already begun to contribute to our revenue and earnings here in Q4. Looking forward, we are targeting Adjusted EBITDA to grow meaningfully in the coming quarters based on these events.

In the near term, we expect Adjusted EBITDA to be up 10%-20% sequentially in the fourth quarter, and we continue to target reaching a run rate of $200 million of annual Adjusted EBITDA from our segments early next year, with no additional capital required to meet that target. In terms of the highlights of each segment, Transtar reported $17.4 million of Adjusted EBITDA, down a bit from an extremely strong 2Q and up from Q1 of this year.

Operationally, Transtar had an excellent quarter, and were it not for the United Auto Workers strike that commenced late in the quarter and higher fuel costs, for which we will be reimbursed in the coming months, the quarter would have been more in line with 2Q results. At Jefferson, EBITDA grew as the ramp-up of our business continues. More importantly, during the quarter, we executed a number of new contracts representing an excess of $20 million of incremental adjusted annual EBITDA. A portion of these contracts commenced this month and will contribute to our results in Q4 and going forward.

At Repauno, adjusted EBITDA loss continued to narrow, while we made significant progress on our phase II expansion project that will transform our business and long-term EBITDA generation. And finally, at Long Ridge, normal operations continued, and we reported $8 million of adjusted EBITDA, reflecting minimal third-party gas sales given the lower overall market prices for natural gas. Briefly on the balance sheet. In the aggregate, we had $1.3 billion of debt at September 30 and no near-term maturities.

Approximately $750 million of debt was at our Jefferson segment and $25 million was at Repauno. At both of these entities, debt is non-recourse to the parent, carries low coupons and long duration, and is not callable in the event of the sale of the business. In essence, we view this debt as an asset. In addition, our Transtar freight rail business is 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 now and then plan to turn it over to questions.

I'll start with Transtar on slide 7 of the supplement. Transtar posted revenue of $41.9 million and Adjusted EBITDA of $17.4 million in Q3, down from revenue of $42.5 million and Adjusted EBITDA of $20.3 million in Q2. Carload volumes grew for the quarter, while average rate for carload declined, as the mix of freight was impacted somewhat with higher margin projects related to the auto sector being softer in the quarter as a result of the UAW work stoppage. Operating expenses for the quarter were higher as a percentage of revenue, driven primarily by events that we believe were unique.

The largest variance was in fuel expense, which was higher given the overall higher price of diesel during the quarter. While we passed through this cost to our customers, we received reimbursement a few months after incurring the expense, so we will see the fuel effect reverse itself here in Q4. Away from U.S. Steel, we also continue to make good progress on multiple initiatives at Transtar to drive incremental third-party revenue and EBITDA.

The bar chart on the right of slide 7 of the supplement shows the incremental EBITDA we expect from each initiative. In total, we expect these programs to represent approximately $7.5 million of quarterly Adjusted EBITDA, or $30 million on an annual basis, commencing in 2024.... Now on to Jefferson. Jefferson generated $16.6 million of revenue and $7.8 million of Adjusted EBITDA in Q3, compared to $17.1 million of revenue and $7.1 million of EBITDA in Q2. The P&L at Jefferson continued to demonstrate 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 the process involves no heating or blending, as crude often does. But refined products also generate a high margin since the operating costs associated with refined products are quite low. For Q3, you'll see we posted lower revenue due to this dynamic, but continued to grow EBITDA due to the lower operating expenses. But the more important development during Q3 was on the new business front.

We secured three new contracts at Jefferson, which in total represent $20 million of long-term annual Adjusted EBITDA. While the third quarter did not contain any EBITDA from these new contracts, three of the two contracts have already commenced at this stage in Q4, so we'll see the positive benefits in our Q4 results ahead. The third contract 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.

Another highlight at Jefferson is the recent return of Canadian crude volumes after almost two years of absence. Canadian crude handling is a very high-margin business for us, and this quarter, we'll be handling multiple unit trains of Canadian crude oil that we hope represent more consistent flow from the Canadian market as rail volumes pick up and pipelines out of the region are constrained. In summary, we're bullish on Jefferson and continue to execute on the lease up of the remainder of our capacity.

We're seeing something we haven't—we've been waiting to see for quite a while now at the terminal, competition for our capacity. At Repauno, we continue to narrow our operating loss. Our phase I multiyear contract to transload natural gas liquids is continuing smoothly. That contract with an investment-grade counterparty has minimum volume commitments and does not expose Repauno to commodity prices.

With this phase I having commenced, Repauno is finalizing contracts for its much larger phase II transloading system. As detailed on slide nine of the supplement, our phase II system is expected to materially increase our storage 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. Moving on to Long Ridge. Long Ridge generated $8 million in EBITDA in Q3 versus $10.4 million in Q2.

Power plant operations were steady, while gas production continued to be managed down during the quarter in the currently lower gas pricing environment. At gas prices of under $1.25 per MMBtu, our profit on third-party sales is less impactful, so we have deliberately limited production and opted to keep excess gas in the ground in anticipation of higher gas prices, which are typical as we enter the winter season.

We're taking a planned maintenance outage here in the fourth quarter, so our results will see some impact from that outage, but we expect the outage to be routine, with the next outage scheduled for the late spring. At Long Ridge, we're focused on wrapping up financing for our recently acquired gas resources in West Virginia. We expect to have final debt commitments in place in Q4 at an extremely attractive rate, so that positions us well to start gas production when prices recover. We also continue to progress a number of initiatives at Long Ridge.

We're expecting final approvals in the coming months for the uprate 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're 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 direction as we enter the final quarter of 2023, and excited about the things to come in the next year ahead. 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)

Thank you. If you'd like to ask a question, please press star one one. If your question has been answered and you'd like to remove yourself from the queue, please press star one one again. Our first question comes from Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna (Managing Director)

Good morning, you know, congratulations on all the progress, contracting up, assets this quarter. One thing I'd be curious to kick it off here is, with all the new contracts at Jefferson, can you predict where EBITDA will shake out in the 4Q of this year?

Ken Nicholson (CEO)

Hey, good morning, Giuliano. We feel very comfortable that Jefferson's gonna be in the double digits in the fourth quarter, probably in the range of $10 million-$12 million in 4Q, and then I think it grows from there commencing in Q1. As I mentioned in my remarks, two of those three contracts have already kicked in. They represent about half of the $20 million. You know, I described three contracts. Two represent about $10 million or $11 million of EBITDA, and the third represents about $9 million of EBITDA. So those two representing annual EBITDA, $10 million-$11 million, have already commenced, and so that'll contribute into the fourth quarter EBITDA year.

Giuliano Bologna (Managing Director)

Very helpful. Just then, switching to Transtar for a minute. I'm curious, what do you think the auto strike impact will be in 4Q this year?

Ken Nicholson (CEO)

Well, it's tough. You know, we're encouraged. We saw Ford reach a tentative deal with the UAW, GM and Stellantis, you know, hopefully close behind. I'll tell you, look, the auto strike had an impact in Q3. I would expect at this point, you know, the impact would be somewhat similar to Q4. It's not- you know, we don't have the crystal ball in terms of the timing of when that all gets resolved. But, you know, we're right now expecting the financial impact to be generally similar to what it was at Q3, but I want to be clear: that doesn't mean the financial results will be similar to Q3.

Remember, at Transtar, you know, it's fuel impact and a handful of other things that- you know, made Q3 a little bit softer. We expect those things to reverse themselves, and so we are targeting EBITDA levels, even with the impact of the auto strike in Q4, to be much closer to Q2 levels, approximately $20 million.

Giuliano Bologna (Managing Director)

Very helpful. And then, on a similar topic, when do you expect the contract rate increases to kick in at Transtar?

Ken Nicholson (CEO)

Yeah, we take annual rate increases, and it's subject to an inflation-based metric. They do range depending upon the individual freight moves. They range from as low as a 5% annual rate increase to as high as a 12% annual rate increase. Those will all commence January 1st. So we'll see the impact immediately in Q1. It's pretty significant. You know, that just the rate increase alone is, you know, up to $5 million of incremental EBITDA.

That's the beauty of railroads. Pricing power is a beautiful thing, and, you know, every penny of price goes straight to the bottom line. You know, we've been seeing some of that inflation in our costs, leading up to this, but we get the rate increase in Q1, and so, that'll be a nice, refreshing moment to start seeing higher rates, as we enter 2024.

Giuliano Bologna (Managing Director)

Very helpful. And then, the more general question, but assuming Transtar fully normalizes in Q1 of 2024, and assuming the two Jefferson contracts are fully ramped up, that are kicking in during the fourth quarter, when do you expect to be at the $200 million EBITDA run rate?

Ken Nicholson (CEO)

Our goal is to be there in Q1. $50 million of EBITDA in Q1 from the four segments. You know, I think that's if we're not there, we're gonna be very close to there. And I feel very comfortable that we'll be there by Q2. You know, I think with Jefferson, we've got a pretty clear line of sight. You know, I'll note with Jefferson, it's not just the three contracts we signed here in Q3.

We are working on a significant contract at Jefferson that we're very hopeful we'll have executed here in Q4, that would start to contribute to Q1, and that would put Jefferson in a place where we are pretty close to our anticipated run rate for that whole asset. You know, our goal is to hit the $50 million quarterly EBITDA, $200 million run rate at some point in Q1. If we aren't able to get there, I know we'll be very close and we'll hit it in Q2.

Giuliano Bologna (Managing Director)

Very helpful. Can you talk more about the Uinta Basin and, in light of all the currently announced production boosts in the region, if there are any opportunities there for Jefferson?

Ken Nicholson (CEO)

Yep, funny you ask that. Yeah, funny you ask. That is the big, you know, next project for us and what we're hoping to get signed up this quarter. It's a pretty dynamic market out in Utah. Right now, there is... When you just think about the scale of the market, total production in the basin is about 150,000 barrels per day of crude oil. The first 85,000 barrels stay local and feed the local refineries, and anything in excess of that 85,000 is, quote, unquote, "exported out of the state," and all that crude oil goes to the Gulf. Today you've got, you know, 65,000 barrels going to the Gulf.

Production is increasing from 150,000 barrels per day to 300,000 barrels per day over the next 6-12 months. You get a sense for the scale. All of that incremental 150,000 barrels are gonna be exported to the Gulf. You know, that's the equivalent of three trains per day. At Jefferson, we have the capacity to bring in roughly a train a day, maybe a little bit more, of waxy crudes. It's a very high-margin business for us because not only do we get the heating and unloading, but we get the blending as well, because the crude is typically blended before it goes into a refinery. You know, it's a rapidly developing market.

There's been a lot of capital committed to more production and the expansion of the two major terminals out in the basin. So we expect to see more product flowing out of the basin as early as here in the fourth quarter and certainly into next year, and we're very hopeful that a big chunk of that volume comes to Jefferson.

Giuliano Bologna (Managing Director)

Very helpful. And switching to Repauno, I'm curious if you'll be able to announce who the third-party entity is that you signed a contract with.

Ken Nicholson (CEO)

Well, I think what we'll certainly do is once that contract is signed, it's you know we're finalizing it right now. It's getting very close. We will certainly issue a press release to make sure people are aware that it's been signed. It's a very big development for Repauno, so that's certainly something we will communicate once executed. Whether we can share the name of the counterparty, obviously, we'll need to get their permission to do so. I can tell you it is a you know it's a very well-known large integrated energy company and investment grade and what have you. Obviously, if we can share their name, we definitely will.

Giuliano Bologna (Managing Director)

That's great. I'm curious if you're still looking at tuck-in acquisitions at, on the rail side with Transtar and around Jefferson.

Ken Nicholson (CEO)

We always are, are... We're certainly always looking. I will admit that market has been a little bit lighter. You know, capital markets and financing for acquisitions is slower these days. Yes, we're looking at one situation in the freight rail space that I think is exciting, could be an interesting fit for Transtar. We're looking at a couple opportunities in the terminal space that would be nice tuck-ins with Jefferson or highly complementary to what we do at Jefferson.

You know, hopefully, hopefully those things, you know, come together. We'll always be looking and, and, and hoping to add, you know, scale to our businesses through investments and acquisitions. I think we're just gonna be, you know, cautious and conservative, of course, you know, as we go.

Giuliano Bologna (Managing Director)

That's very helpful. I really appreciate the time and letting me ask you some questions, and I will jump back in the queue. Thank you.

Ken Nicholson (CEO)

Thanks.

Operator (participant)

Thank you. That concludes the question and answer session. I'd like to turn the call back over to Alan for any closing remarks.

Alan Andreini (Head of Investor Relations)

Thank you, Michelle, and thank you all for participating in today's call. We look forward to updating you after Q4.

Operator (participant)

Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day!