FTAI Infrastructure Inc. (NASDAQ:FIP) Q4 2023 Earnings Call Transcript

FTAI Infrastructure Inc. (NASDAQ:FIP) Q4 2023 Earnings Call Transcript March 1, 2024

FTAI Infrastructure Inc.  isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Q4 2023 FTAI Infrastructure Earnings Conference Call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. 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: Thank you, Michelle. I would like to welcome you all to the FTAI Infrastructure fourth quarter and full year 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.

Ken Nicholson: Thank you, Alan, and good morning, everyone. This morning, we’ll be discussing our financial results for the fourth quarter and full-year of 2023. And in doing so, I’ll be referring to the earnings supplement, which we recently posted to our website. Before getting into the financials, I’m pleased to report that our Board has authorized a $0.03 per share quarterly dividend to be paid on April 5 to the holders of record on March 27. Now on to the results. Fourth quarter adjusted EBITDA prior to corporate expenses came in at $42.4 million, up 32% quarter-over-quarter and representing a new record for the company. For the year, adjusted EBITDA was $140.9 million, also a record and up 60% from fiscal 2022. Our strong performance for the quarter was driven by record results at our two largest companies, Transtar and Jefferson, and the realization of several of the initiatives that we set up to accomplish throughout the 2023 year.

But we’re equally excited about the prospects for our two other businesses, Repauno and Long Ridge, which continue to make significant progress on new opportunities that contribute materially to EBITDA that can contribute materially to EBITDA in the year ahead. With the strong results at Transtar and Jefferson, as well as the momentum at Repauno and Long Ridge, we are now forecasting to exceed our previous target of $200 million of run rate EBITDA during 2024. In terms of the highlights of each segment, Transtar reported $23.6 million of adjusted EBITDA, its highest quarterly results since we acquired the business in 2021. Operationally, Transtar had an excellent quarter with growth in both carload volumes and pricing, while operating costs remained steady.

EBITDA margins exceeded 50% in Q4, a first-time accomplishment for the company. Recently implemented pricing increases and several new business activities, including our new railcar repair facility have already begun to contribute in 2024, so we expect momentum to continue at Transtar in the year to come. At Jefferson, EBITDA was $14.3 million for the quarter, also a new record. Volumes continue to grow at Jefferson, and we’re advancing more new business opportunities than ever. We’ll talk in more detail shortly, but today, we are in advanced negotiations with a number of new and current customers for incremental business representing a total of $75 million of annual EBITDA once commenced. At Repauno, the adjusted EBITDA loss continued to narrow, and we made significant progress on our Phase 2 expansion project that will transform our business and long-term EBITDA generation.

And finally, at Long Ridge, results reflect the previously scheduled maintenance outage during the quarter, as well as reduced third-party gas sales given the lower price environment for natural gas. Had it not been for the outage, our results would have been in line with our third quarter. I’m as optimistic as ever about our business at Long Ridge, and I believe the macro outlook for modern, efficient power plants is as strong as it’s been since we first commissioned the plant a couple of years ago. Briefly on the balance sheet. In the aggregate, we had $1.34 billion of debt at December 31, $560 million of debt was at the corporate level, while the rest of our debt was at our business units. Transtar is completely debt free, while approximately $750 million of debt was at our Jefferson segment and $50 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 a sale of the business. With continued growth in our earnings and favorable capital markets, we’re expecting to be in a position to refinance our corporate balance sheet during the 2024 year, which will allow us to reduce fixed charges and increase distributable cash flow. I’ll talk through the detailed results at each of our segments and then plan to turn it over to questions. Starting with Transtar on slide seven of the supplement. Transtar posted revenue of $44 million and adjusted EBITDA of $23.6 million in Q4, up from revenue of $41.9 million and adjusted EBITDA of $17.4 million in Q3. Both carload volumes and average rate per car load grew in the quarter while operating expenses were steady.

Fuel expenses were more than offset by fuel surcharge revenue during the quarter as we recovered some of our higher fuel costs incurred in Q3 with fuel surcharge revenue received in Q4. We’re making great progress on multiple initiatives at Transtar to drive incremental revenue and diversify our customer base. The table on the right side of slide seven of the supplement shows the incremental EBITDA we expect from this year for each initiative. In total, we expect these programs to represent approximately $4 million to $6 million of quarterly EBITDA and $20 million on an annualized basis. Now on to Jefferson. Jefferson generated $19.3 million of revenue and $14.3 million of adjusted EBITDA in Q4, compared to $16.6 million of revenue and $7.8 million of EBITDA in Q3.

Volumes handled at the terminal grew significantly to an average of 185,000 barrels per day, driven primarily by increased refined products, while crude oil volumes remained steady. Operating expenses were also lower for the quarter as our recent cost savings initiatives started to kick in. In the aggregate, we’re expecting $8 million of annual cost savings to be fully implemented by the middle of this year. Also during the quarter, we executed a new lease at our Jefferson South terminal. On our income statement, we recorded a gain in connection with this new lease. To elaborate a bit on this, we do not expect this type of event to be a one-time item. We have a low basis in land at Jefferson South given the attractive purchase price we negotiated in purchasing the site.

When we execute new leases substantially above the book value of the land at Jefferson South, we record a financial gain. At current market lease rates, we expect to continue to record gains like this as we lease up the remaining acreage at the site. We have approximately 200 acres available for lease. So while these gains may not repeat every quarter, we certainly expect to record similar or larger gains in the future. But more importantly, the new business environment at Jefferson remains robust, and we’re advancing more opportunities for both conventional energy products as well as clean, hydrogen-based fuels. Last year, we secured a new 15-year contract for the transloading and export of ammonia commencing in 2025. We currently have three additional projects in advanced negotiations, together with last year’s ammonia contract represent approximately $75 million of annual EBITDA once operational and have the potential to be transformational for Jefferson.

If we’re successful in converting these opportunities to business wins, we will far exceed our prior target of $80 million of annual EBITDA. Now on to Repauno. We continue to narrow our operating loss and our Phase 1 multiyear contract to transload natural gas liquids is continuing smoothly. As a reminder, that contract with an investment-grade counterparty has minimum volume commitments and does not expose Repauno to commodity prices. Our negotiations continue in connection with the much larger Phase 2 transloading system, although we are now in discussions with additional producer customers, which should lead to higher committed volumes. Phase 2 can ultimately quadruple the capacity of natural gas liquids handled at the terminal. So while negotiations have been slower than hoped, the scale of the ultimate commercial opportunity is larger.

I’m confident we’ll sign up our first customer for Phase 2 in the next 30 to 60 days and start construction immediately thereafter. In the aggregate, we expect Phase 2 to cost approximately $200 million to build, funded entirely with tax exempt debt and to generate approximately $40 million of annual EBITDA once completed. Closing out with Long Ridge. Long Ridge generated $5.1 million in EBITDA in Q4 versus $8 million in Q3. Power plant operations were impacted by a 20-day planned maintenance outage, while gas production continued to be managed down during the quarter and the currently lower gas price environment. At gas prices of under $1.50 per MMBtu, our profit on third-party sales is less meaningful, so we limit production and opt to keep excess gas in the ground.

This month, we expect to close a new financing for our recently acquired gas resources in West Virginia. The new facility is long-term with an extremely attractive rate, so that positions us well to start gas production when prices recover. More importantly, we have been actively advancing a handful of significant opportunities with on-site power customers at Long Ridge, which could have a significant positive impact on EBITDA. Late last year, we entered into a letter of intent with a data center operator for the lease of a portion of our property and utilization of a substantial portion of our power capacity. The LOI is the first step to what we expect to be a binding long-term agreement and includes non-refundable deposits, a portion of which will hit the P&L in this first quarter.

On a macro level, data center demand in the PJM region alone is expected to grow from 3 gigawatts of power needs currently to nearly 17 gigawatts over the next six years. New renewable resources will not be sufficient to meet this demand, and owners of modern efficient gas plants like Long Ridge have the potential to benefit greatly in the coming years. With that in mind, we’ve also been advancing negotiations with an existing tenant that will require up to 200 megawatts of our power capacity. We expect to be in a position to execute this LOI in the month of March. To wrap up, we’re pleased with our direction as we enter the year ahead and excited about the things to come. Now let me turn the call back over to Alan.

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

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Q&A Session

Operator: Thank you. Our first question comes from Giuliano Bologna with Compass Point. Your line is open. Giuliano, if your telephone is muted, please unmute.

Giuliano Bologna: Thank you. Hopefully, you can hear me now. Congratulations on a great quarter. The first thing I’d like to ask is can you talk a little bit about the railcar repair facility and why you’re excited about the prospects with the railcar facility?

Ken Nicholson:

.: We already signed a new piece of business with a major oil company for the repair of tank cars. I think we’ll have the facility at full capacity at some point this year, at full capacity, I think, generates at least $10 million of annual revenue. And generally, these types of facilities typically have EBITDA margins of about 30% to 40%. So you get a sense for adjusted EBITDA impact from this one facility. I think most importantly, it is the first of many to come. Now that we’ve got this one behind us across Transtar portfolio, we’re setting up to open many more. And so these things are highly, highly accretive. I can’t say, in every case, we’ll get full participation from the states or regions in funding. But nonetheless, they’re relatively low cost of building to be highly accretive. So we’re setting out on a big plan to build many more of these and really get into the business.

Giuliano Bologna: That’s helpful. And then next, can you give us your thoughts on the sale of U.S. And the impact you have at Transtar?

Ken Nicholson: Yes. The punchline is, I think it’s — in the event that transaction closes and we think our view is it will — the — I think it’s only good for us. Nippon Steel is the fourth largest steel manufacturer in the world. It’s an investment-grade counterparty. As part of our contract today with U.S. Steel, our contract must be assumed by the new buyer. And so — but U.S. Steel is certainly a very strong credit. Nippon Steel is even a better credit. So we like that dynamic. I would also say Nippon is — their core business is operating blast furnaces. I mean, obviously, the part of the U.S. Steel business that they find most attractive are the blast furnaces in Pittsburgh and Gary. And I think they want to do a lot with those two facilities.

So I’m excited about it. I don’t think the transaction is going to close anytime necessarily soon. I mean what we’re hearing is it will be later this year. Again, I think it’s only good things to come out of that transaction.

Giuliano Bologna: That’s helpful. And then on the Jefferson side, can you expand on the $75 million plus of new initiatives that you outlined?

Ken Nicholson: Yes, definitely. The $75 million includes four pieces of business, new pieces of business. Two of them are at Jefferson South and two are at our main terminal. At Jefferson South, one has already been executed. That’s the ammonia contract I described. And the second is also with a separate counterparty and even larger hydrogen-based fuels contract, very, very long term and very significant in scale. I really see Jefferson South becoming a clean fuels, hydrogen-based fuels hub. Just with the first contract alone, Jefferson South will become the largest exporting facility for carbon-free ammonia in the United States. And this second contract that we are in advanced stages in negotiating, we’ll obviously take it to another level.

The two other projects are at the main terminal, both involve crude oil. One involves waxy crudes, and that contract is advancing well. We’re at the documentation stage, and that’s with the new customer. And then the final contract, which is also for crude oil at the main terminal is with an existing customers based on expansion of existing crude oil business we do with one of our customers. And I think that one is also advancing well. Look, I think all four of these contracts and opportunities, one is already executed, I think the remaining three, we should be in a position to execute in the next three to six months. I mean, as you know, at Jefferson, when you sign up new very long-term deals, these things take some time to negotiate and ultimately inked once you have them signed up, they live very long.

So I think it’s probably the next three to six months when we have all these things in place. And as I said in my comments, if we’re successful in closing all these out, it will be absolutely transformational for Jefferson and the value proposition now.

Giuliano Bologna: Very helpful. And then on the Repauno side, are you finally close on Phase II Repauno? And can you expand a little bit more about the potential size and increase at Repauno?

Ken Nicholson: Yes. Admittedly, we were hoping to have that contract executed. We are very, very close. And I do think it is simply a matter of time. It is when, it is not if. But as I described, and I think you obviously picked up on, as we have been negotiating others, particularly the producer side, have been showing interest. And so I think we have the potential to expand the revenue base, no additional cost. The original — the contract was just one counterparty would not have used the full capacity of the system. And so now having more counterparties involved allows us to operate the cryogenic tank at a capacity closer to full capacity. So where we had previously been in EBITDA estimates that were slightly less the $40 million run rate, I think we’re now much closer to that $40 million run rate.

Giuliano Bologna: That sounds good. And then I’d be curious where you are with the counter permits at Repauno? And what do you think that does to the value of Repauno?

Ken Nicholson: I think it’s significant to the value. We are — process is continuing as you may appreciate obtaining permits for this kind of unique work is a process, but we’re deeply engaged with the state of New Jersey in the permitting process. We currently anticipate receiving the permits in the second-half of the year. Caverns are a different animal in a much — in a very good way from aboveground storage. They cost one-third to a half of the cost to build above ground. They live effectively forever and the maintenance of a cavern is significantly lower than the maintenance of an aboveground tank. They also mean that you maintain the aboveground land for use for other things, like additional rail and what have you. So it’s incredibly efficient.

Repauno is a unique asset and that we sit on top of this incredible granite formation. Obviously, we operate one cavern today, and that thing has been operating flawlessly, handling butane and propane. And so we’re very, very excited about the new caverns. I think just the active obtaining permits is a significant driver in value creation, and that value only grows as you start construction and actually build out the cavern. Look, Repauno is today one of the bigger gateways in the Northeast here for the export of natural gas liquids. With the caverns, we will be very, very close second to our neighbors Transfer just down the river. And so I think it’s huge for the value creation at Repauno even before we have the things up and running.

Giuliano Bologna: That’s very helpful. And then where do you want to see nat gas prices before you start increasing production?

Ken Nicholson: Yes. The prices have been low at Long Ridge for — particularly in the net in the Utica Marcellus formations for quite some time. And so the past few quarters, we have not seen a lot of excess gas production. I can’t say I have a great view as to whether gas prices are going to stay where they are or go up, I think the general consensus is they’ll creep up from here over the next few quarters. So hopefully, we’ll be in a position to produce some additional gas and sell into the market. Generally, we like to see gas prices at $2 an MMBtu before we make significant commitments to gas production. So fingers crossed, we get to that level, and we can start producing more gas. Obviously, West Virginia is going to be in a good position to start gas production here as soon as we close out the financing, which I expect to do this month.

We don’t quite meet the $2 level in West Virginia. The cost of production is a little bit lower, maybe closer to $1.7. So we’re ready to go there. And prices today are hovering around $1.50 in the PJM region where we are. So we’re close. We’re close. But I think we’d like to see gas prices climb a little bit more before we commit to large-scale production.

Giuliano Bologna: Sounds good. And then one final one. As your infrastructure assets mature as more permits are received. I’m curious with all the emphasis [Indiscernible] in terms of infrastructure assets. Are you seeing any reverse increase on any of your assets?

Ken Nicholson: Yes. As you noted, I think there — look, market conditions are generally favorable. There’s a lot of money in the private equity system and investor base and a lot of dedicated infrastructure funds that are out there. There have been not a lot of available targets. And so there’s a lot of hunting for rail assets, terminal assets and long-lived infrastructure assets. And so yes, we — I would say the reverse inquiry has been a little bit more active than it had been. I think it’s a function of what’s going on in the market, but it is probably more a function of our assets really maturing and getting to the point where we’re getting to a level of scale where independent financing of the assets is more readily achievable and what have you.

So obviously, we’re responsive to that reverse inquiry as would be appropriate. But yes, I think the M&A market is a little bit more robust. We’re seeing fewer opportunities to buy things in certain sectors, but it also means there’s a lot of demand from folks and not a lot of supply, which with our assets, that’s not a bad position to be in.

Giuliano Bologna: These are very helpful. I appreciate it and that’s was it from me. So now I’ll turn back in the queue. Thank you.

Ken Nicholson: Thanks.

Operator: There are no further questions at this time. I’d like to turn the call back over to Alan Andreini for any closing remarks.

Alan Andreini: Thanks, Michelle, and thank you all for participating in today’s conference call. We look forward to updating you after Q1.

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