FTAI Infrastructure Inc. (NASDAQ:FIP) Q2 2023 Earnings Call Transcript

FTAI Infrastructure Inc. (NASDAQ:FIP) Q2 2023 Earnings Call Transcript July 26, 2023

Operator: 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 a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] 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: Thank you, Michelle. I would like to welcome you all to the FTAI Infrastructure second 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. 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.

Kenneth Nicholson: Thank you, Alan, and good morning, everyone. This morning, we will 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 stand-alone 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. Now 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 when 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. So 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 are 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 start-up of operations under our new multi-year tolling contract experienced in the early parts of the quarter and we are entering Q3 now generating positive adjusted EBITDA. And 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 at 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, so 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 continue 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. Now 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. But 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. More importantly, 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.

New ship docks clears the path for our refinery customers to now fully utilize Jefferson storage and transloading capabilities, and 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 that 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 multi-year 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 our product to commodity prices. We did experience some initial start-up costs that resulted in a small adjusted EBITDA loss in Q2, but as I mentioned, those should be behind us, and we are 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 offtakers 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 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 plants 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 are expecting final approvals in the coming months for the upgrade of the power plant of 505 megawatts, an increase of 20 megawatts from a current generation capacity. That will contribute incremental EBITDA in the range of $5 million to $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 are 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: Thank you, Ken. Michelle, you may now open the call to Q&A.

Q&A Session

Operator: [Operator Instructions] Our first question comes from Giuliano Bologna with Compass Point. Your line is open.

Giuliano Bologna: Hello. Good morning. Thanks for taking my questions. Starting off, I’ve been hearing from a high level, sequentially, 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?

Kenneth Nicholson: Yes, we are. Yes, as our businesses continue to ramp up – thanks, Giuliano, by the way, we do – we are expecting to maintain 20% EBITDA growth from the segments and closer to 25% after corporate expense. I think the only potential blip in that is from time to time, we have scheduled maintenance at the Long Ridge Power plant. And so 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 what Long Ridge ends up doing in that particular quarter. But outside of that, yes, that’s the pace of growth we’re anticipating to continue.

Giuliano Bologna: That’s great. And 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?

Kenneth Nicholson: Yes. I’d say about – directionally about 10% of that EBITDA is attributable to third parties. Obviously, our goal is to continue to increase that and diversify the revenue stream. I think we’ve got a lot of things going on that are going to 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: That sounds good. And then next time – yes. Can you give us a little bit more detail around the $30 million of incremental EBITDA at Transtar and the timing around when that could start to flow through or, I guess, part of it starting to flow through, but the balance of the $30 million?

Kenneth Nicholson: Yes, yes. The vast majority is attributable to third-party business. We have a number of new developments coming online in the coming months, very large railcar 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 going to 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, and that’s coming along great. I would say, of the $30 million, it’s safe to say $15 million to $20 million is in a very, very good place. I wouldn’t say it’s entirely 100% in the bag, but it’s coming along very well.

I’m highly confident in $15 million to $20 million of the $30 million. I think the remaining $10 million or so is for us and the Transtar management team to go get. But I think that’s very achievable given the assets that we have and all the activity around us. So feel very good about where Transtar is today. We had a very good second quarter. I think we’ll continue to have strong third and fourth quarters and slowly chip away at that $30 million in a couple of quarters ahead.

Giuliano Bologna: That’s great. And then from a slightly different angle, I’m curious what do you think the ultimate potential is for Transtar over time?

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

Giuliano Bologna: That’s great. Thanks. And then shifting over to Jefferson, where do you see the near-term growth in EBITDA coming from that will get you to that $10 million-plus or $10 million or greater quarterly EBITDA run rate starting in the third quarter?

Kenneth Nicholson: Yes. I mean I really think we’re largely there as we’re now almost one month 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, I guess commencing immediately, and so that’s going to have an immediate impact. But really from an infrastructure standpoint, it was the completion of the second ship dock. Remember, at Jefferson, we now have three docks and dock space for energy terminals is it’s like the front door to the house. And you can only manage so much volume if you have constraints at your docks. We completed Dock 2. We have been operating with Dock 1 and Dock 3. We completed Dock 2 at the end of June.

And so that was the bottleneck to the entire 6 million barrel logistical system. And now that, that is operating, I think that’s going to be a big sort of contributor to additional volume and additional EBITDA growth. I think it’s going to come from refined products primarily. I think crude oil is 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 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 higher EBITDA.

Giuliano Bologna: Yes, sounds good. Then related to the new 15-year contract at the Jefferson South project, can you tell me a little more about the CapEx for that project and then also kind of the EBITDA contribution around that?

Kenneth Nicholson: Yes. 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 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, I think 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.

So 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. And so 15 years of minimum volumes, locking in what will ultimately become double-digit EBITDA on a $30 million to $40 million investment is something we really like.

Giuliano Bologna: That’s great. Then shifting over to Repauno. How close are you getting approval on the caverns? And also, how close are you securing new contracts to reach FID for Phase II?

Kenneth Nicholson: Those two projects that you just mentioned are now really our sole priority at Repauno. I think we’re about – at some point over the next three months, I think we’ll have the permit in the hands of 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 have like to have had it all done by now, but we don’t control the timing of these things. And so very, very close. Our goal is to have this stuff all done in the next three months.

Giuliano Bologna: Sounds good. And then thinking about the power plant at Long Ridge, obviously, gas sales are the primary source of volatility there in the quarter. Yes, I’d be curious at what price do you see – at what price would you need to see natural gas before turning on gas out again?

Kenneth Nicholson: Yes. I mean our underlying prices today are anywhere from $1.30 to $1.50 in MMBtu. Those are market prices in our region. We produced gas ourselves at slightly less than that. So 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. And we sort of have made the decision that in this environment, we will produce less and bank the gas in the ground knowing that 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. But I would tell you generally, we would target roughly $2 in MMBtu, maybe a little bit less, prices creep up to $1.80, $1.92, I think we’d start turning back on gas production and north of $2 for sure, we would start producing excess gas again and selling into the market.

Giuliano Bologna: Okay. And then thinking about on – about a general question. I’d be curious if you can build the $50 million quarter or $200 million run rate quarter by components, provide a sense of where the growth contribution needs to come from to get to that $200 million run rate that you’re targeting by the end of 2023?

Kenneth Nicholson: Sure. Yes. Maybe just go through it for each of the four segments and then deduct some corporate expense and add it up that way. I mean, Transtar, 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. So that’s the number of Transtar. Jefferson, high-teens, call it $17 million, $18 million at Jefferson at the end of Q4. I feel pretty comfortable with that target. Repauno will continue to be small until Phase II kicks in. Repauno will be $2 million to $3 million of EBITDA. And then Long Ridge should continue to be steady and producing EBITDA of about $12 million for us.

So add all that up, deduct, we’ll probably then, at the end of the year, be closer to $7 million of corporate expense, maybe $8 million, but add up the – I think I said 25, 18, 3-ish, 12 and deduct 8 and you should get pretty close to the 50.

Giuliano Bologna: That’s great. Thanks a lot. Then one last one. I’m curious to know what the current M&A environment looks like for you guys?

Kenneth Nicholson: Yes. 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 business is really maturing and the teams of professionals we put in place, both at the railroad and the terminals business, we are a very capable buyer of additional businesses and assets in those two spaces. Yes, we’re reviewing a lot, I would say, it’s been now 12 months that FIP has been an independent public company, and we are definitely as busy as we have been in that 12-month period looking at investment opportunities. So I’m hopeful we’ll see something in the next few quarters based on all this activity, but you never know.

And like I said, we’ll continue to be very disciplined. But 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: That’s great. I really appreciate the time and answering all my questions. I’ll jump back on the queue. Thank you.

Kenneth Nicholson: Thanks.

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

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

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.