FTAI Infrastructure Q3 2024 Earnings Call Transcript

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October 31, 2024

There are 6 speakers on the call.

Operator

Hello, and welcome to Epti Infrastructure Third Quarter 20 24 Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to Alan Andrini, Investor Relations. You may begin.

Speaker 1

Thank you, Towanda. I would like to welcome you all to the FTI Infrastructure 3rd quarter 2024 earnings call. Joining me here today are Ken Nicholson, CEO of FTI 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.

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 in our quarterly report filed with the SEC.

Speaker 1

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

Speaker 2

All right. Thank you, Alan. Good morning, everyone, and welcome to our Q3 2024 earnings call. For the call today, I'll be referring to the earnings supplement, which you can find posted on 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 November 19 to the holders of record on November 12.

Speaker 2

Now onto the results. We recorded adjusted EBITDA of 36 $900,000 in the Q3, a new quarterly record, up 8% from the Q2 of 2024 and up 50% year over year from Q3 of 2023. We're pleased with the results, but we're even more excited about the opportunities that lay ahead. 3rd quarter was a significant one in terms of momentum we established across our companies with a number of events, positioning us for substantial growth next year and beyond. Across our portfolio, we now have line of sight under executed contracts and commitments representing approximately $70,000,000 of incremental annual EBITDA, which when combined with our current run rate represents total company annual EBITDA of approximately 220,000,000 dollars and the pipeline for new business is as strong as ever.

Speaker 2

Today, we are pursuing more new business opportunities than any time since the spin off of our company. If we're successful in converting these opportunities into contracted business, we estimate annual EBITDA potential in excess of 300,000,000 dollars These estimates exclude the impact of any new investments or acquisitions we may act on such as tuck in acquisitions at TranStar or data center developments at Long Ridge. In terms of the highlights of each segment, TranStar delivered another strong quarter posting $21,100,000 of adjusted EBITDA. Carloads and rates for the quarter held steady while third party revenue continued to grow. Our focus at TranStar is to maintain organic EBITDA growth in the range of 15% annually and drive further value creation through accretive investments and acquisitions.

Speaker 2

We continue to actively pursue a number of acquisition opportunities and have added resources to the M and A team to ensure we are well positioned to act on opportunities as they arise. At Jefferson, EBITDA was $11,800,000 for the quarter. Construction of our 2 contracted projects is proceeding on budget and on time for revenue service commencing in the spring summer of 2025. Once operational, these two projects will contribute a total of $20,000,000 of annual EBITDA under 5 year and 15 year terms. During Q3, we also entered into advanced negotiations on a number of projects involving volumes of both conventional and renewable products.

Speaker 2

These new business opportunities if successfully contracted represents another $60,000,000 of annual EBITDA at Jefferson. At Rapallo, the Q3 was a pivotal one with the execution of our first long term contract for our Phase 2 transloading system. With the first contract in hand, we've commenced construction of the system and are in active discussions with several additional parties for the remainder of the system's capacity. We plan to raise all financing for Phase 2 construction in the tax exempt debt markets in the coming months and the commercial landscape is extremely favorable positioning us to have multiple contracts in place by year end. And finally, at Long Ridge, we generated $11,100,000 of EBITDA for the quarter, reflecting a nearly perfect capacity factor of 99%.

Speaker 2

I'll talk about our upcoming financing plans at Long Ridge here shortly, but suffice to say we have ambitious plans for Long Ridge in the coming quarters and believe the asset has tremendous upside potential. Onto the balance sheet, we had total debt of $1,500,000,000 at September 30, $567,000,000 of debt was at the corporate level, while the rest of our debt was at our business units. TransStar continues to be completely debt free, while approximately $925,000,000 of debt was at Jefferson and $44,000,000 was at Roquano. We're planning a number of accretive debt financings in the coming months and I'm going to briefly talk about each. First, at Repauno, we will issue $300,000,000 of low cost taxes and debt to fund the Phase 2 construction.

Speaker 2

The financing is slated to be launched in November and should close in December and will fully fund all required capital needs. 2nd, at Long Ridge, we're preparing to refinance existing debt, reducing our overall fixed charges and providing meaningfully more flexibility. In conjunction with the Long Ridge financing, we plan to also convert our existing power sale hedges into new arrangements that reflect a higher price received for the power we generate and therefore results in higher cash flow at Long Ridge. To explain this opportunity more specifically, at Long Ridge, we sell power today under a series of financial contracts or hedges that we entered into at the time we started construction and that were required in order to arrange the initial debt funding to build the power plant. Those hedges are still in place today and are set at a price equal to approximately $28 per megawatt hour, a figure well below current market prices.

Speaker 2

In conjunction with the refinancing of our existing debt, we have an opportunity to reset the price of power by entering into new hedges closer to current market prices. Depending upon the final financing terms and pricing of the new power hedges, we anticipate the financial impact will be substantial. Our goal is to consummate the financing and new power hedges prior to year end. And finally upon completion of the Rapano and Long Ridge financings, both of which we expect to be accretive and credit enhancing, we plan to refinance our corporate bonds and existing preferred to reduce fixed charges and increase cash flow after debt service for common shareholders. I'm going to talk through the detailed results at each of our segments and then I will plan to turn it over for questions.

Speaker 2

Starting with TransStar on Slide 7 of the supplement, TransStar posted revenue of $44,800,000 and adjusted EBITDA $21,100,000 in Q3 compared with revenue of $45,600,000 and adjusted EBITDA of $22,100,000 in Q2. Carload volumes and average rates held steady for the quarter and we expect the environment for volumes and rates to remain strong for the remainder of the year. Operating expenses were also stable as fuel costs and other material costs were largely unchanged for the quarter. 3rd party customer activity continues to grow with our railcar repair facility in Pittsburgh and new transloading locations all ramping up. At our transload facility in Michigan, we're completing an expansion this quarter to take the number of car slots for transloading from 15 slots to 90 slots as initial customer demand for truck to rail transshipments has exceeded our existing capacity.

Speaker 2

All in, we're currently expecting 4th quarter EBITDA to come in higher than the 3rd quarter EBITDA and anticipating maintaining a roughly 15% organic growth rate next year with incremental growth driven by M and A opportunities as they arise. Now on to Jefferson. Jefferson generated $19,700,000 of revenue and $11,800,000 of adjusted EBITDA in Q3 versus $21,200,000 of revenue and $12,300,000 of EBITDA in Q2. Reduced volumes for the quarter were the result of lower refined products exports as Exxon performed maintenance at one of their Beaumont production units as well as fewer crude oil trains, which we now expect to receive in Q4. Lower volumes had little impact on revenue as all of our contracts contain minimum volume requirements, which mitigated the majority of volume shortfalls.

Speaker 2

We expect throughput in the 4th quarter to return to over 200,000 barrels per day. Our two contracts representing $20,000,000 of incremental annual EBITDA commenced in the spring summer of next year and we are currently in late stage negotiations for additional contracts with multiple parties to handle conventional crude, refined products and renewable fuels. If we're successful in converting these opportunities to business wins, we'll post annual EBITDA in excess of $100,000,000 far exceeding our prior targets. Now under EPONA, we signed our first contract for our Phase 2 export system during Q3 and we expect to execute a number of additional contracts during the Q4. Construction of the Phase 2 system has commenced assuming full utilization and rates consistent with those already executed, Phase 2 can contribute $60,000,000 to $70,000,000 of annual EBITDA once complete.

Speaker 2

Total estimated construction cost of $300,000,000 will be funded in the tax exempt markets as I described earlier. In the current capital markets environment, we're expecting interest rates in the range of 5% to 6%, making the Phase 2 project highly accretive to the equity value of Repauno. While Phase 2 remains our current priority, we're excited about the advancement of the next phase of Repauno, including development of additional underground storage for which we expect to complete permitting in the months to come. Finally, closing out with Long Ridge. Long Ridge generated $11,100,000 in EBITDA in Q3 versus $8,800,000 in Q2.

Speaker 2

As I described, power plant capacity factor was $99 for the quarter, while gas production continued to be managed down during the quarter in the currently lower gas price environment. We're advancing a number of developments that have potential to significantly increase EBITDA and cash flow at Long Ridge. The recent capacity auction results take effect in June next year and represent a $32,000,000 increase in annual revenue and EBITDA or $16,000,000 for our 50% share. All indications are the capacity pricing will remain at higher levels for the years to come, driven both by the anticipated surge in demand for power by hyperscalers as well as mandated retirements of coal fired power plants. Higher capacity revenue together with the higher power sale revenue related to our previously described refinancing will be transformation of the cash flow profile and value proposition at Long Ridge.

Speaker 2

Meanwhile, we continue to advance a number of initiatives including the upgrade of the power plant to 505 Megawatts and Behind the Meter projects including most notably negotiations with data center developers. Based on the current state of discussions, we anticipate entering into 1 or more transactions for data centers at Long Ridge during the first half of twenty twenty five. To wrap up, we're pleased with the quarter and excited about the remainder of 2024 and the 2025 year ahead. Now I will turn the call back to Alan. Thank you, Ken.

Speaker 2

Towanda, you may now open

Speaker 1

the call to Q and A.

Operator

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

Speaker 3

Good morning, Anjo. Congratulations on all the new initiatives you're working on. It seems like it's been a lot of progress in the last couple of quarters. As a first question, I'm curious if you can expand on the longer expansion that you're talking about. And then maybe give us a little bit of sense of where the new contracts get priced because it seems like all that potential accretion is incremental to the $20,000,000 plus a quarter, dollars 80 plus 1,000,000 annualized EBITDA that you're already talking about in the supplement.

Speaker 3

So I'd be curious to see if you have a sense of that financing structure and also what the upside could look like there?

Speaker 2

Yes, absolutely. Good morning, Giuliano, and thanks for the question. Yes, you're right. It will be meaningfully accretive to the cash flow generation and what FIT would report for its 50% share. Just to give you some context, as I said, when we first started construction of the Long Ridge plants, we raised $600,000,000 of debt to fund construction.

Speaker 2

And with that debt, we entered into these power sale hedges to fix revenue and enhance the credit, as part of required under the debt agreement. As I described, those swaps were entered into at $28 per megawatt. Today, pricing is closer to $42 per megawatt. That price changes every day, but it's been steady at in the low 40s now for a number of weeks and a few months. Assuming we enter into new swaps at that $42 per megawatt hour level.

Speaker 2

The incremental EBITDA at Long Ridge is approximately $50,000,000 annually, pretty significant. There is a cost to terminating the existing swaps and so we would incur more than the refinanced amount of $600,000,000 to fund the termination costs, but it is a highly accretive transaction. The incremental EBITDA over time is well in excess of the incremental cost of financing and terminating those swaps. So it is a very, very financially attractive transaction. I suspect the new debt will be placed between now and the end of the year.

Speaker 2

In isolation, we'll also reduce just the overall cost of borrowing. Our existing debt today is has a high 8 handle on it on a blended basis. And we think we can be in the low 8s, if not, the high 7s on a pro form a basis. So we expect that financing to be very accretive.

Speaker 3

That's very helpful. I appreciate that. And then maybe turning over to the holding company level, your Holdco debt subsidy traded a lot better since it was issued a couple of years ago. I'm curious where you think you could refinance the 10.5% HoldCo notes today?

Speaker 2

Yes. I think if we did a refinancing right now today, we could refinance with a 7 handle. Our bonds today have a 10.5% coupon. Our existing preferred stock is at 12%. So if we can refinance in the 7% s in and of itself, that's extremely attractive.

Speaker 2

I think we do even better if we bring a transaction immediately after the Repauno and Long Ridge transactions are behind us because those are independently credit enhancing to the whole story. So that's our plan, the sequencing of the 3 transactions are Repauno and Long Ridge as soon as seemingly possible to be followed by the FIT refinancing immediately thereafter.

Speaker 3

That's very helpful. I appreciate it and congrats on all the progress you're making on the 2 different assets. And I will jump back in the queue.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Brian McKenna with Citizens JMP. Your line is open.

Speaker 4

Thanks. Good morning, everyone. So I had a few questions on TransStar. First, do you have any updates on the U. S.

Speaker 4

Steel transaction from your end? And just any updated thoughts on the potential implications here?

Speaker 2

Hey, Brian, good morning. I'll start by just saying, it's obviously uncertain as to whether Nippon gets the final approval. And I'm going to get to our view on that in just a second. That said, I can't tell you it won't have a material impact on TransStar one way or the other. I would say it's slightly better for us if Nippon is approved because they intend to invest significantly in the Pittsburgh, Mon Valley complex.

Speaker 2

And so that's obviously a good thing for TransStar. But at the end of the day, that transaction itself, we don't expect to be terribly material or have much meaningful downside to TranStar in the event Nippon is not approved. I am optimistic about Nippon being approved for to close on the acquisition. I'm not sure if you saw, but just a few weeks ago, the labor unions that had been more difficult, supported came around and finally supported the transaction and recommended that the government approved the Nippon transaction. So there that was a fair number of headlines around negotiations with the unions and it sounds like support of the unions is now in hand.

Speaker 2

So that's a big development. My understanding is at this stage, CIFFINS approval is slotted for sometime in December and that's what we're expecting. The decision is slotted in December and if I had to guess, as I said, we're optimistic about it. In the event Nippon were not approved, we don't think it has a material impact on business at TransStar.

Speaker 4

Yes. Okay, got it. That's helpful. And then just a follow-up on TransStar as well. You've clearly been talking about the potential for M and A in and around TransStar.

Speaker 4

So where do things stand on this front? And what's your expectation around the timing of any transactions? Is there a way to think about the potential accretion from a transaction? And then ultimately, how additive could some of this M and A be relative to the 15% annual organic growth target you've laid out?

Speaker 2

It could be meaningful. We are always looking at transactions. I would tell you there is a we've seen a bit of an increase in market activity. We're currently looking at 3 opportunities. 2 of them on the slightly smaller side, somewhere between $5,000,000 $15,000,000 of annual EBITDA and one is larger.

Speaker 2

I guess I would describe we're in the middle innings, if you will, of those processes. And a couple of them are negotiated transactions, one is a more competitive transaction. Look, it will be meaningful. That is part of the thesis at TranStar. It is an amazing platform for future acquisitions and it's part of the business plan.

Speaker 2

And these are businesses, freight rail portfolios trade at 15 times EBITDA. It's a pretty well established multiple in the M and A market. And I think as TransStar diversifies its revenue base through external investments and acquisitions, we will migrate to that multiple in the mid double digits. And if you just do the math, acquire $50,000,000 of EBITDA, take combined EBITDA to $150,000,000 put a $15,000,000 multiple on that with no leverage, that is significant in terms of value creation. This is a business we've owned now for 3 years.

Speaker 2

It has consistently over the past 3 years grown at 15% plus annual EBITDA, CAGRs. And I think that organic growth is certainly still going to be there for several years to come, but M and A is a game changer at TransStar in terms of the value proposition. So we are extremely focused on it.

Speaker 4

All right. That's great. Appreciate it. I'll leave it there.

Speaker 2

Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Sherif Almagrabi with BTIG. Your line is open.

Speaker 5

Hey, good morning. Thanks for taking my questions. First with Jefferson, the $20,000,000 of EBITDA from new contracts next year, could you unpack what contracts are included in that and what investment remains to get them across the line?

Speaker 2

Yes. Good morning, Sherif. Happy to do that. Two contracts. The first is a contract for handling crude oil.

Speaker 2

It's a 5 year contract with 1 of our 2 major refineries and that commences on April 1 next year, generates about $8,000,000 of annual EBITDA. So that's $8,000,000 of the $20,000,000 The second contract is with a global major ammonia producer. It's an ammonia export, ammonia transloading contract. It's a 15 year deal. It commences July 1 and represents a minimum of $12,000,000 of EBITDA annually with some escalators over the 15 year contract term.

Speaker 2

It's a great, great contract. Both projects are fully funded. We raised the money in the tax exempt markets in the second quarter And they are on time, on budget. I don't see any risk of delay at this stage. We're pretty well advanced with both projects.

Speaker 2

And so it's just a matter of completing the construction and then bringing the contracts online.

Speaker 5

That's helpful. And then on Long Ridge, what GE's role in the operating, if any? On their call, they mentioned growing service backlog. And I'm wondering if there's a lead time associated with getting that into the queue, especially given you could see a data center contract in the first half of next year?

Speaker 2

Yes. They GE, it is of course the turbine we bought from GE. There is no mechanical change that needs to happen to the turbine. The turbine is capable of generating 505 Megawatts as is today. There is software that regulates power generation today at 4 85 Megawatts.

Speaker 2

There's no additional component or part that we require. It is literally just a software change. We could do it in a day. We just need regulatory approval to increase the generation by 20 megawatts. There is no incremental cost and nothing other than a reprogramming of software to allow the turbine to generate the 505 megawatts.

Speaker 2

So outside of it being GE's technology, we don't rely on anything from GE to enact the upgrade.

Speaker 5

Got it. Thanks for taking my questions.

Speaker 2

Thanks.

Operator

Thank you. Ladies and gentlemen, 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 Q4.

Operator

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

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