FTAI Infrastructure Q1 2023 Earnings Call Transcript

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Provided by Quartr
May 3, 2023

There are 4 speakers on the call.

Operator

Hello. Thank you for standing by, and welcome to FTAI Infrastructure Q1 2023 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 I would now like to hand the conference over to your speaker, Alan Endri. You may begin, sir.

Speaker 1

Thank you, Towanda. I would like to welcome you all to the FTI Infrastructure Q1 2023 earnings call. Joining me here today are Ken Nicholson, the CEO of SI 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.

Speaker 1

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 and our quarterly report filed with the SEC.

Speaker 1

Now I would like to turn the call over to Ken.

Speaker 2

Thanks, Alan, and good morning, everyone. Morning, we will be discussing our Q1 financial results and also providing an update on the latest developments at each of our business segments. For Before we get to the financials, I'm pleased to report that we will be paying 3rd, dividend is a standalone company with our board authorizing a $0.03 per share quarterly dividend to be paid on May 26 to the holders of record on May 15. Now on to the financials. We posted a strong first quarter financially and continue to generate Across our portfolio, adjusted EBITDA for the quarter came in at $30,100,000 prior to corporate expenses, up sequentially from 9 $500,000 in the Q4 of 2022.

Speaker 2

In comparing our 2 most recent quarters, it's important to remind everyone that our 4th quarter results included the impact of our Long Ridge power plant outage. That said, our adjusted EBITDA for the most recent Q1 was up meaningfully even after adjusting for the outage at Long Ridge. More importantly, during the quarter, each of our 4 segments made good progress in advancing their respective businesses and we are well positioned for substantial growth in 2023 and the years ahead. All in, we continue to target achieving this year a run rate of $200,000,000 of annual adjusted EBITDA from our segments with no additional capital required to meet that target. In terms of the highlights of each segment, TranStar continues to be a substantial producer of cash flow for us with adjusted EBITDA coming in at $17,200,000 for the quarter, up 27% from the Q4 of last year.

Speaker 2

At Jefferson, we began to handle volumes of refined products for export under our new contract with Exxon. Exxon completed the Blade expansion in March, so we expect to see these volumes continue to increase in the quarters ahead. At Repauno, while the financial results Adjusted EBITDA loss, the loss was largely a result of the forced sale of natural gas liquids in inventory that were required to be removed prior to commencing our new Multi year tolling contract on April 1. With a new tolling contract in place, we expect Repaunter to generate an operating profit going forward. And finally, at Long Ridge, operations returned to normal after the 4th quarter outage, and we reported $11,300,000 of adjusted EBITDA.

Speaker 2

All in, a very good quarter setting the stage for continued growth ahead. Briefly on the balance sheet. We ended the quarter with $40,000,000 of cash. In the aggregate, we had $1,300,000,000 of debt shown on the balance sheet at March 31, approximately $515,000,000 of which is issued at or guaranteed by our holding company and and approximately $750,000,000 of which is issued on a non recourse basis at the individual asset level. Our non recourse debt is issued primarily at Jefferson at an Low interest cost, long duration with weighted average maturity of 14 years, ample flexibility to pay dividends with excess cash flow And not callable in the event of a sale.

Speaker 2

In short, we view the non recourse debt at Jefferson as a valuable asset. I'll spend a few minutes providing more details on each of our segments and then plan to turn it over for questions. Starting with TransStar on Slide 7 of the supplement, TransStar posted revenue of $41,000,000 and adjusted EBITDA of $17,200,000 in Q1, up from revenue of $35,800,000 adjusted EBITDA of $13,500,000 in Q4 of last year. Both carload volumes and average rate per carload were higher for the quarter as U. S.

Speaker 2

Steel production at the Gary, Indiana And Mon Valley, Pennsylvania facilities returned to more normal levels with blast furnaces returning from temporary idling. 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. We expect these programs to represent approximately $30,000,000 of incremental EBITDA opportunities annually with little to no additional investment.

Speaker 2

Now on to Jefferson. Jefferson generated $19,100,000 of revenue and $6,500,000 of adjusted EBITDA in Q1 compared to $15,500,000 of revenue and $4,500,000 of EBITDA in Q4. Volumes for the quarter increased materially both for refined products and crude oil With total volumes averaging 163,000 barrels per day versus 102,000 barrels per day in Q4. The bulk of volume increases were attributable to the new Exxon export contract with the completion of Exxon's $2,000,000,000 Beaumont refinery expansion in March, Increasing Exxon's refinery capacity by approximately 250,000 barrels per day to a total of 620,000 barrels per day. Exxon Beaumont is now the largest refinery in North America.

Speaker 2

While business grows at Jefferson's main terminal, we also made Solid progress on a recently acquired nearby property in Beaumont. We're seeing multiple opportunities for the storage, translating and export of renewable fuels and hydrogen based products. And with Jefferson nearing full build out, this site is an ideal extension for our business. We expect this new addition, which we refer to as Jefferson South to contribute incremental EBITDA as early as this year and to ultimately represent up to $50,000,000 of opportunity for incremental EBITDA. Shifting to Repauno, we commenced on April 1 our multi year contract to transload natural gas liquids using our Phase 1 system.

Speaker 2

The contract, which is with one of the world's leading trading companies, has minimum volume commitments and does not expose Repauno to commodity prices. In advance of commencing operations under the contract, Repauno sold in March its then existing inventory recording a loss on the sale driven by depressed butane prices. While not ideal timing, it was necessary in order to commence the tolling contract and not something we expect to reoccur. With Phase 1 having commenced, Trepano is now focused on securing business for our larger Phase 2 transfloating system. As detailed on Slide 9 of the supplement, Our Phase 2 system is expected to materially increase our storage and throughput capacity and when it comes online in a couple of years.

Speaker 2

In the aggregate, we expect Phase 2 to cost approximately $200,000,000 to build and to generate in excess of $40,000,000 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 $11,300,000 in EBITDA in Q1, up from an adjusted EBITDA loss of $6,600,000 In Q4, which included the power plant outage that persisted for the bulk of the Q4. Power generating capacity for Q1 was at 93% And gas production averaged 81,000 MMBtu per day in excess of the 72,000 MMBtu required for plant operations.

Speaker 2

As we look to the remainder of 2023, we expect both plant operations and gas production to be stable, while we progress a number of initiatives to increase revenue and profits. In the near term, we're expecting final approvals in the coming months for the up rate of the power plant to 5 0 5 megawatts, an increase of 20 megawatts from our current generation capacity that will contribute incremental EBITDA in the range of $5,000,000 to $10,000,000 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. So to wrap up, we're pleased with our start to 2023 and excited about the things to come in the year ahead. With that, let me turn the call back over to Alan.

Speaker 1

Thank you, Ken. Towanda, you may now open the call to Q and A.

Operator

Thank you. Our first question comes from the line of Giuliano Volodinov with Compass Point. Your line is open.

Speaker 3

Good morning and great to see the recovery in TransStar and Long Ridge this quarter. Starting off on the TransStar side, I'm curious if U. S. Steel is back up to full capacity now. And related to the U.

Speaker 3

S. Steel topic, I'm curious if there's any other business opportunities that transfer to that into with U. S. Steel?

Speaker 2

Yes. Hey, Giuliano, thanks. They are the blast furnaces all blast furnaces are back up and running. And so operations there seem to be back to stable and normal conditions. That doesn't mean for TranStar, there isn't further opportunity for growth.

Speaker 2

Of course, U. S. Steel brings in Raw materials and then ships out finished steel products and they do that by 3 primary modes rail, 1st and foremost, Marine, freight by barge, and then lastly by truck. I think the biggest opportunity for TransStar is The conversion of truck traffic today to rail. Rail is materially more efficient.

Speaker 2

We've been working with U. S. Steel On a handful of new opportunities where we think we can save them money. And I definitely expect that we'll realize some of those opportunities During the path of this year. So yes, certainly opportunity probably 10% to 15% incremental revenue opportunity from our existing base Through converting currently trucked freight to rail.

Speaker 3

That's great. And Yes. I was saying on the TransStar topic, where do you stand on the initial third party business opportunities that you're working on That you're mentioning should drive, call it, roughly $30,000,000 of incremental EBITDA. And what's the timing of some of those opportunities starting to roll in?

Speaker 2

Yes. I'd say it's during the course of this year, 2023, they're really in 2 primary categories. 1 is just third party freight movements. We continue to open up transload facilities to stimulate some of that. Our most successful one to date is up in the Short area on the Delray connecting railroad that's doing very well.

Speaker 2

That itself just one translate facility will contribute at least $1,000,000 Of revenue this year, probably up to $2,000,000 So we plan to open ideally dozens of TransLink facilities in the year ahead. So you get a sense for the impact of what that could have. Car repair is the other big component. We've got a big facility in Pittsburgh that is under Construction and that will be opening mid year. We have an existing facility that needs some refurbishments, but down in the Texas area in Longview, And that will be opening as well later this year.

Speaker 2

And so precise timing is probably roughly in the Q3 when those facilities are able to be opened up And start generating revenue, but you get a sense by the time we swing into the Q4, we should be in a pretty good place for both 3rd party business and the incremental repair revenue.

Speaker 3

That's great. And I think granted you're still kind of ramping back up EBITDA trends are in the Q1, but before the outage, we're running $8,500,000 $19,000,000 a quarter range With just the base U. S. Steel business and the $30,000,000 I would add, call it, dollars 7,500,000 a quarter. I'm curious about thinking about You're going to get to $25,000,000 a quarter or $100,000,000 run rate by the end of the year?

Speaker 3

Yes.

Speaker 2

I feel good about it. Really, if we did nothing, No more third party customers and no car repair. The year should be about $80,000,000 of EBITDA For TransStar $75,000,000 to $80,000,000 We're running today just taking the Q1, if you just annualize Q1, it's about $70,000,000 And I just think with normal growth, rate growth The year ahead and some small additional volume growth, the full quarter effect of all the blast furnaces being operating and what have you, that should be $75,000,000 and Probably closer to $80,000,000 of EBITDA. So bringing in the car repair and third party business incrementally to that, We should be at an annual level of $100,000,000 to $110,000,000 or $25,000,000 plus per quarter by the end of the year.

Speaker 3

That's great. And where is the application on the switching topics a little bit to Long Ridge, where does the application Stan, for the incremental 20 megawatt operating, so bringing you up to 505 megawatts?

Speaker 2

It is Scheduled to be approved in either July or August of this year. We're obviously rooting for July because there is no incremental cost to that up rate and The additional power revenue largely drops to the bottom line. Obviously, there's a little bit more gas that's needed to be produced or purchased In order to generate the additional megawatts, but we would be at the high end today of the $5,000,000 to $10,000,000 of incremental EBITDA. Call it $10,000,000 of EBITDA starting in July or August. We have half of that, of course, on our own P and L.

Speaker 2

So it would add 5 To the Long Ridge numbers starting in the Q3.

Speaker 3

That's right. And I'm curious where things Stan, related to the prospects of behind the meter customers and if there are any active discussions ongoing at the moment?

Speaker 2

We're always in active discussions. I would say, those are longer term projects. We obviously have new light that will be commencing construction on their facility late this year. We have a handful of other very large prospects. These are prospects, each of which would require I mean, frankly, They require 500 megawatts of power.

Speaker 2

They're significant. They are primarily focused on the data center space. There is data center developers today are with the advent of chat GPT AI and what have you and the demands for power, There is a significant rush to new data center capacity. And some of the bigger players in the space are Accelerating their development plans. We're in a dialogue with all of the major players.

Speaker 2

There's one in particular who is closer. And again, the numbers are pretty significant. Those tend to be longer term developments. And so our goal, of course, is to sign up an additional opportunity in addition to Newlight At some point in the next 3 to 6 months. And then typically that would be a 1 to 2 year build before we start actually seeing the revenue from that project.

Speaker 2

But obviously, it's incredibly valuable once you have it in place.

Speaker 3

That's great. And when I look at leverage, you're at 11 $300,000 of EBITDA this quarter and that incremental, call it, dollars 5,000,000 based on your 50% interest would get you up to, Yes, call it $12,500,000 per quarter. I'm curious what the drivers are to get $15,000,000 a quarter or $60,000,000 a year run rate for Long Ridge? Yes. It

Speaker 2

is 1 of 2 things. It's either, as we just discussed, the additional Behind the meter customers that may take some time, but the path to that annual $60,000,000 would definitely be there. Otherwise, it's capacity auctions. Capacity auctions have been down materially over the past couple of years, way off market. If they return to normal, that alone basically gets us close to that 60,000,000 It's just been an incredibly weak the capacity auction market has been incredibly weak from our perspective And set with meeting capacity revenues are well below where they have traditionally been.

Speaker 2

That swings back in our favor. Then I think we're right there next With the $60,000,000 annual run rate.

Speaker 3

That sounds good. And then switching over to Jefferson. Is the Blade project with Exxon fully ramped up at this point? And if it's not, I'm curious, you guys know what the exact timeline is to reach Full capacity, correct.

Speaker 2

Yes. I would say every month is growing. We averaged 163,000 barrels per day in the Q1. This Quarter to date, Q2 to date for which we really had largely 1 month behind us, we're in excess of 200,000 barrels. And so just to give you a sense for the momentum, we have capacity to handle in excess of 350,000 barrels per day.

Speaker 2

So we still have plenty of capacity. But yes, we're definitely seeing increased volumes as we're swinging into the Q2 here and the trend line It's very encouraging. I would say there's still excess capacity and Exxon is, as I said in my comments, It's the biggest refinery in North America, frankly, the Western Hemisphere. And so there's still plenty of additional opportunity. We have the capacity to handle it.

Speaker 2

But I like the momentum and The current run rate and like what we saw in April.

Speaker 3

And then I'd be curious if you can just expand on Jefferson South And if you can disclose how much you paid for the land and if there's any CapEx related to Jefferson South that's expected in the near term?

Speaker 2

Yes. I'll describe it a little bit. It's a significant site. It's about 600 acres in total. We paid Less than $25,000,000 for the site.

Speaker 2

It has 2 existing tenants that are Major players, and has about 200 acres available for development. It's on the other side of the river from Jefferson's main terminal. The 2 tenants, Since main terminal. The 2 tenants, there's some minor freight movements for the 2 tenants, but we do provide services to the tenants. So there are really no net operating expenses for So it doesn't impact owning that site, doesn't really generate incremental revenue or certainly doesn't generate any incremental EBITDA for us, but represents a significant development Opportunity.

Speaker 2

There is no CapEx that is required just to maintain the site. Like we've done at Rapana, we will not invest Capital into that site until we have a contract that justifies doing so. I do think in the coming months, we will be During our first contract with a 3rd party for some transporting business, that'll be the first of a handful of Opportunities, we acquired this site with a set of opportunities that we had underwritten and are now pursuing And seeking to secure, again, I think we'll have one here in the relatively near term. It'll represent somewhere between $5,000,000 $10,000,000 of incremental EBITDA and probably a $30,000,000 to $40,000,000 capital investment. But again, we won't be investing any capital until

Speaker 3

That makes sense. And then, I guess, it would be great if you could provide a bridge Where you are now from an EBITDA perspective to at Jefferson to reaching the $80,000,000 or so per year run rate?

Speaker 2

Yes, yes, yes, yes. The simple way to think of it is incremental volumes, Assuming the same rate per barrel, obviously generate incremental revenue and our expenses are largely fixed. So those incremental revenue dollars dropped straight to the bottom line. Just to put it though in context, as I said, we moved 163,000 barrels Per day in the 4th in the Q1 on average at an average rate of $1.30 per barrel. That $1.30 is a bit of a mix up.

Speaker 2

There's some storage revenue, there's throughput revenue, and I've been just trying to keep it simple. So $162,000 at $1.30 per barrel, generating about $19,000,000 of revenue And $6,500,000 of EBITDA. We have capacity to handle, as I said, dollars 350,000 up to almost 400,000 barrels per day. If you just double capacity, however, take the 165,000 that we did in the Q1 to about 300,000 And hold the same rate per barrel of $1.30 you've basically gotten right there to the $80,000,000 run rate. You generate about $20,000,000 of EBITDA in the quarter Because a significant portion of the expenses are fixed, they don't grow with that volume growth and you'd be generating about $19,000,000 to $20,000,000 in the quarter.

Speaker 2

As I said, the $163,000 for the Q1 is less than where we're currently running. We see Significant positive momentum. So the path to getting to that 300,000 barrels per day plus is a process. It is a path, But I like the momentum. We're running north of 200,000 barrels per day.

Speaker 2

So we're on our way. I think it takes the bulk of the 2nd quarter ultimately to get there at some point in the Q3, we swing into that kind of level.

Speaker 3

That's very helpful. And then switching over to Repauno, I'd be curious where EBITDA should go Now that the contract went live, the new butane contract went live on April 1, I realize it's probably a little bit of transition during the Q1 The contract went live, I'm curious where the quarterly or annual run rate should be?

Speaker 2

Yes. Well, our target for Phase 1 is $10,000,000 the $10,000,000 of annual EBITDA. The contract in place Is for about 2 thirds of our total Phase 1 capacity. So if you just assume That single contract, it's probably closer to $5,000,000 of annual EBITDA. The incremental capacity that's available Phase 1, which is something we expect to secure here in the second quarter, would get you to about the $10,000,000 annual run rate.

Speaker 2

Obviously, the Q1 was not a it was a little bit frustrating. We had to spend a little bit of money to get ready for The new contract, we had to sell some inventory, market timing was unfortunate there. That is behind us. But with the existing contract in place, it's we'll certainly be in the black. And if we can secure additional volumes to use all the capacity to Phase 1, we should be hitting, I would say, in the second half of this year, dollars 2,500,000 per quarter or $10,000,000 annual run rate.

Speaker 3

That's great. And then I've been curious where you are on the prospects for securing the two sides for Phase 2? And if there's any CapEx at Repauno other than the Phase 2 build out?

Speaker 2

Yes. No additional CapEx, sir, upon it. We're done outside of what would be Phase 2. Everything's working Extremely well and there's no need for additional capital other than the Phase 2 expansion. We have a handful of folks, All very large international players that we're in a dialogue with about volumes for Phase 2.

Speaker 2

I'm glad you asked the question the way you did because it's not just offtake that we're seeking. It is supply on the one side and then the offtake On the other side, frankly, it's less us seeking that, it's more the off taker. The off taker is securing volumes of Butane and propane from the Marcellus and Utica and then they're, of course, securing their own offtake in the European and African markets. I would say we're very close with 1 brand name, very well known player. And that's been several, several months dialogue and back and forth.

Speaker 2

We have 2 others that are close behind. Look, these are Massive institutions, they typically don't move terribly quickly. They're very thoughtful, of course, because they're committing to 5 to 10 years of a supply chain. But I'm confident we'll get at least one of these guys to sign up In the coming months. And I think all we need is 1.

Speaker 2

Once we have 1, we'll commit to the project and go ahead and finance it and start construction. It's ready to go. It is permitted engineered, ready to go. We just want to make sure we have the contract in hand before we commit the capital.

Speaker 3

That's great. And then switching away from the assets more the specific assets. I'm curious when you think the company will be in a position To start paying down debt and reducing leverage?

Speaker 2

We're targeting that for later this year. At this point, we have better uses for our capital. Look, our cost of debt capital Is relatively high, but at the same time, right now the way our securities work, the cost to prepay that debt is So relatively high. We have pretty attractive uses for our free cash flow. So I don't necessarily see us Using cash to repay debt at some point this year, that's something that would start making sense as we swing Into the Q4 and swing into 2024, the ultimate plan would be by the time we get to mid-twenty 24, we're in a position to refinance the entire balance sheet.

Speaker 2

And that I think would be a highly accretive thing to do at lower rates with a lot of excess cash. We're really a very different company, a very different Credit profile and what have you when we're generating $200,000,000 of EBITDA annually. And so we'll have the ability to refinance our debt at lower prices In the summer of next year, maybe we'll take advantage of things that we have the opportunity to prior to that, I'd love to. But I do think any refinancing we do should be a highly accretive thing when we ultimately do it.

Speaker 3

That's very helpful. And I'm looking across the board, are you looking at any other M and A or JV opportunities At the 4 main assets at this point?

Speaker 2

Yes. The answer is yes. We're always looking at stuff. There are a handful of opportunities in the ports and terminals sector that we've been looking at. Those Tend to be a little bit more spotty.

Speaker 2

We're primarily focused on opportunities in energy terminals, Leveraging some of the relationships and the platform that we have today with Jefferson and Repauno. I'd say the most recent pickup in activity is definitely on the rail Space, it was very quiet last year. We're starting to see a pickup in opportunities. I'm thrilled we own TranStar, of course, because it's a phenomenal platform for acquisitions. And yes, we're definitely seeing More opportunities in the rail space.

Speaker 2

And that's a nice thing, nice tuck in opportunities or some that are slightly more chunky, but Highly complementary with TransStar. So we're always looking at stuff and, yes, I'm pleased that we're seeing a little bit more liquidity or Fluidity in the M and A market and expect that to last for the bulk of 2023.

Speaker 3

That's great. Thank you for answering a number of questions and let me monopolize the Q and A session there. But I appreciate it. I'll hold the answers and I will jump back in the queue. Thank you.

Speaker 2

No problem. Thanks very much.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Alan.

Speaker 1

Thank you, Towanda, And thank you all for participating in today's conference call. We look forward to updating you after Q2.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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