FTAI Infrastructure Inc. (FIP) Earnings Call Transcript & Summary

Good morning, and thank you for standing by. Welcome to the Second Quarter 2023 FTAI Infrastructure Earnings Conference Call. [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.

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.

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 in 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 15 to the holders of record on August 8. 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 4 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, then 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'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 start-up of operations under our new multiyear tolling contract experienced in the early parts of the quarter, and we're 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 fit 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. 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. The 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 2 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 2 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 1 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 start-up costs that resulted in a 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 1 having commenced, Repauno is now focused on securing business for our larger Phase 2 transloading system. As detailed on Slide 9 of the supplement, our Phase 2 system is expected to materially increase our storage and throughput capacity when it comes online in 2 years. In the aggregate, we expect Phase 2 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're expecting final approvals in the coming months for the upgrade of the power plant to 505 megawatts, an increase of 20 megawatts from our 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'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.

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

[Operator Instructions] Our first question comes from Giuliano Bologna with Compass Point.

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 '23?

Yes, we are. Yes, we're -- 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.

That's great. Then let's go on an asset-to-asset basis, starting off with Transtar. I'm curious if there's any third-party contribution in the $20.3 million that you reported in the second quarter?

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.

That sounds good. And then can you give us a little bit more detail around the $30 million of incremental EBITDA of Transtar and the timing around them that could start to flow through -- or I guess, part of it is starting to flow through the balance of the $30 million?

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. It's -- 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 we 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 into couple of quarters ahead.

Okay. And then from a slightly different angle, I'm curious what you think the ultimate potential is for Transtar over time?

Well, I mean, the potential could be significant with acquisitions and additional investment. Without additional investment, given the capacity and the leverageability 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, 2 to 3 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 2 to 3 years, our longer-term plan is to hit $150 million number, plus or minus.

That's great. 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?