FTAI Infrastructure Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 2, 2024

There are 6 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Second Quarter 20 24 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 Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Alan Andrini, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, Victor. I would like to welcome you all to the FTI's Q2 2024 earnings call. Joining me here today are Ken Nicholson, the CEO of FTI Infrastructure and Scott Christopher, the company's CFO. We have posted an investor presentation in 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 the 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

Okay. Thank you, Alan, and good morning, everyone. This morning, we will be discussing our financial results for the Q2 of 2024. 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 August 20 to the holders of record on August 12.

Speaker 2

Now onto the results. We continued strong momentum in 2Q recording adjusted EBITDA prior to corporate expenses of $41,800,000 up 15% from the Q2 of 2023 and up 12% sequentially from the Q1 of 2024. Each of our businesses performed in line with or slightly ahead of our expectations for the quarter. Looking forward, we expect the second half 2024 to demonstrate continued momentum across all four companies as a result of new business wins and initiatives we have underway to capitalize on a series of macro trends. Our thesis has always been to own and control core infrastructure in major markets with strong competitive positions, long term contracted cash flow and a broad spectrum of opportunities to act upon to drive incremental growth.

Speaker 2

Whether it is new energy flows through our Jefferson and Repauno assets, data centers and surging demand for power at Long Ridge or growing list of strategic opportunities at TranStar, we believe our portfolio of companies today is at the center of the largest set of opportunities since the inception of our company. We continue to forecast generating of $200,000,000 of run rate annual EBITDA by the end of 2024 and expect to meaningfully exceed that result in 2025. In terms of the highlights of each segment, TranStar delivered another strong quarter posting $22,100,000 of adjusted EBITDA. Carloads for the quarter held steady while average rates came in at another new record. The 2nd quarter represented the 1st full quarter of operations at a railcar repair facility on the Union Railroad in Pittsburgh.

Speaker 2

We expect this facility as well as a handful of others in development to represent meaningful EBITDA growth for the car repair business. Also, we continue to grow our 3rd party customer base at TranStar adding a number of new customers in Q2. At Jefferson, EBITDA was $12,300,000 for the quarter as we handled record volumes averaging 215,000 barrels per day of crude oil and refined products. During the quarter, we completed a new financing at Jefferson accomplishing a number of objectives including refinancing near term maturities, funding construction projects and funding a tender offer at a discount for some of Jefferson's existing tax exempt bonds. At Repauno, we are preparing start construction on our Phase 2 cryogenic tank in this Q3.

Speaker 2

We're in the process of arranging all financing and the commercial landscape is extremely favorable positioning us to have multiple contracts in place when we close the financing. And finally at Long Ridge results for 2Q include a scheduled maintenance outage in May and limited third party gas sales, but do not reflect the tremendous upside inherent in the asset. This week, the results of the recent capacity auction were made public coming in at a level 10 times higher than current capacity pricing and reflecting the surge in demand for power driven by AI focused data centers. I'll talk in more detail in a bit, but the capacity auction results alone represent approximately $32,000,000 of incremental EBITDA for Long Ridge or approximately $16,000,000 for our 50% share of the asset for the 2025 to 2026 capacity season. Briefly onto the balance sheet, we had total debt of $1,600,000,000 at June 30, dollars 5 64,000,000 of debt was at the corporate level, while the rest of our debt was at our business units.

Speaker 2

TransStar continues to be completely debt free, while approximately $948,000,000 of debt was at Jefferson and $50,000,000 was at Rapano. The Jefferson financing that we completed in Q2 enabled us to accomplish 3 things. First, we refinanced a small portion of existing debt coming due next year. 2nd, we funded construction activity in connection with 2 recently signed contracts. And third, we funded the tender offer of capturing some of the trading discount in Jefferson's outstanding tax exempt bonds, which carry lower coupons.

Speaker 2

We expect to opportunistically pursue more tender offers in the coming quarters to capture additional discount and increase our equity value in Jefferson. I'll talk through the detailed results at each of our segments and then plan to turn it over to questions. Starting with TransStar on Slide 7 of the supplement. TransStar posted revenue of $45,600,000 and adjusted EBITDA of $22,100,000 in Q2 compared with revenue of $46,300,000 and adjusted EBITDA of 21 point $7,000,000 in Q1. Carload volumes held steady while average rates registered a new record of $6.67 per carload.

Speaker 2

We expect the overall environment for carloads to remain strong during the second half of this year with U. S. Steel production level steady and third party customer activity growing. Operating expenses were stable as fuel costs and other material cost items were largely unchanged for the quarter. At TransStar, we're making good progress on our various initiatives to drive incremental revenue and diversify our customer base.

Speaker 2

2Q was our 1st full quarter of operations at our new railcar repair facility on our Union Railroad. During the quarter, we handled a total of 8 16 railcars. Given the demand outlook, we're preparing to introduce a second shift at the facility, which will provide capacity now to handle up to 1800 cars per quarter. During the quarter, we continue to add new third party customers and expect to add a half a dozen more in the second half of this year, further diversifying our revenue base. And finally, on June 1, we commenced a lease with Norfolk Southern for a 41 mile extension of TranStar's current East Ohio Valley Railroad.

Speaker 2

The extension provides TranStar with additional commercial opportunities, which have the potential to contribute meaningful EBITDA in the near to midterm. With a good path for organic growth in front of us, we're increasing our focus on the strategic front, staffing up our corporate development team and engaging with multiple parties. TranStar is an excellent platform for acquisitions of other short line and regional rail assets and we hope to act on 1 or more opportunities in the coming quarters. Now on to Jefferson. Jefferson generated $21,200,000 of revenue $12,300,000 of adjusted EBITDA in Q2 versus $18,600,000 of revenue $6,800,000 of EBITDA in Q1.

Speaker 2

Both throughput volume and revenues came in at new records. Approximately 2 thirds of our volume for the quarter was in refined products, with the other 1 third in crude oil. We generate higher rates for handling crude, so the revenue mix was approximately fifty-fifty. We continue to see a pickup in volumes of waxy crudes from Utah and are bullish about the future. In 2Q, Jefferson became the 1st terminal in the United States to load waxy crudes for export.

Speaker 2

Following that successful initial ship loading, the customer requested 3 additional cargoes that occurred during the quarter. With our unique handling capabilities, Jefferson opens a major gateway for waxy crude exports and we're working with producers in the Uinta Basin to create long term consistent flows through Jefferson to international markets. The new business environment at Jefferson remains extremely attractive and we are advancing more opportunities for both conventional energy products as well as clean fuels. 2 recently executed long term contracts will commence in 2025, representing $20,000,000 of annual EBITDA. 1 contract relates to the export of clean ammonia at our Jefferson South terminal and the other relates to crude oil flows through our Southern Star pipeline.

Speaker 2

More importantly, we are now currently negotiating additional contracts representing approximately $60,000,000 of annual revenue that will be transformational for Jefferson. As we said last quarter, if we're successful in converting these opportunities to business wins, we will far exceed our prior targets of $80,000,000 of annual EBITDA. Now on to Repauno. As Phase 1 operations continue, we're preparing to start construction of our much larger Phase 2 transloading system. As a result of increased demand that we are seeing, we have expanded the scope of Phase 2 to accommodate higher volumes and now expect the Phase 2 system will provide capacity for translating up to 75,000 barrels per day of natural gas liquids including propane, butane and other products.

Speaker 2

Total construction costs are expected at $250,000,000 to $275,000,000 which will be funded entirely with tax exempt debt. Assuming full utilization and rates that we are negotiating with counterparties, Phase 2 can contribute approximately $75,000,000 of annual EBITDA once complete, meaningfully more than our initial expectation of $40,000,000 based on contracts currently being finalized. In closing out with Long Ridge, Long Ridge generated $8,800,000 in EBITDA in Q2 versus $10,400,000 in Q1. Our power plant capacity factor was 69 percent for the quarter as the plant went through scheduled maintenance for the bulk of the month of May. Were it not for the maintenance outage, EBITDA at Long Ridge would have exceeded Q1.

Speaker 2

Gas production continued to be managed down during the quarter in the currently lower gas price environment. More importantly, we have been experiencing a number of developments with the potential to significantly increase EBITDA and cash flow at Long Ridge. This week capacity auction results were reported with capacity pricing for the mid 2025 to mid-twenty 26 period announced at a nearly 1,000% increase versus current pricing. To put that in perspective, today Long Ridge generates capacity revenue of just under $5,000,000 annually. Under the new pricing environment, our annual capacity revenue at Long Ridge will be $37,000,000 for the 2025 to 2026 season with the incremental $32,000,000 dropping entirely to the bottom line.

Speaker 2

The increase in pricing is a result of several factors including the anticipated surge in demand for power in our region as a result of AI data centers and retirements of coal fired power plants. While we're benefiting from the higher capacity price environment, we also have been making good progress on landing tenants directly for 1 or more on-site behind the meter data center projects. At Long Ridge, we own ample acreage adjacent to our power plant and continue to engage with multiple parties for the lease of property and utilization of a substantial portion of our power generation. Data center demand in the PJM region is projected to exceed 15 gigawatts over the next 5 years and efficient readily available gas plants like Long Ridge have the potential to benefit greatly in the coming years. To wrap up, we're pleased with the quarter and expect the remainder of 2024 to reflect continued momentum.

Speaker 2

I'll turn the call back to Alan.

Speaker 1

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

Operator

Thank you. And at this time, we'll conduct a question and answer session. Our first question comes from the line of Giuliano Bologna from Compass Point. Your line is open.

Speaker 3

Good morning. It's great to see continued performance. Yes, making progress on all the assets. Thank you. First question on Transar.

Speaker 3

I'm curious what percentage of revenue was 3rd party at Transar when you first completed the acquisition compared to where you are where a third party revenue stands today?

Speaker 2

Yes. Thanks, Giuliano. When we bought the business, it was largely it was almost entirely a U. S. Steel revenue base, about 95% of the revenue came out of U.

Speaker 2

S. Deal. Today, we are in the low 80s. We're below 85% of revenue coming from U. S.

Speaker 2

Deal. And I think by next year, it would be down into the 70s. Our ultimate goal is to get that business organically to something in the mid-60s derived from U. S. Steel and the remaining third of the business from 3rd party customers.

Speaker 2

Obviously, if we're successful making acquisitions, which is something we're increasing our focus on, we'd further

Speaker 3

continuing on the transfer thing, you mentioned potential for tuck ins and I'm curious if there's any particular type of short line you're looking at tuck in to Transurp?

Speaker 2

We're looking at we look at everything. I would say the ones that we tend to focus more on any properties that have some regional overlap. We of course like businesses that are similar in nature to TransStar switching lines, industrial large industrial switching lines. And I think one area in which we're somewhat differentiated as a buyer is we actually don't mind individual assets that have a fair amount of concentration because we may look at a real asset that is entirely agricultural in nature or energy liquids in nature. But we've whatever we do, we've got such a base at TranStar with U.

Speaker 2

S. Steel that all that does is further diversify the overall revenue base. And so while others may shy away from shoreline railroads that have higher concentrations in customers or commodities, we actually find that slightly more better fit for us.

Speaker 3

That's very helpful. And then switching over to Oppano, Can you update us on the cavern approvals? And then curious what impact you think cavern approvals could end up having on the value of Repauno?

Speaker 2

Well, it would be, I mean, significant. Look, we're going to get the permits for the caverns. That's been a lengthy process, but we'll be getting those permits during the second half of the year, this fall. And we'll be able to start construction on the new caverns as we make our way into 2025. It takes a couple of years to build out the cavern storage.

Speaker 2

I mean, look, it's a huge value driver. I mean, some of our some of the bigger players in the industry are well aware of the value proposition of cavern storage versus above ground storage, right. It's half the cost to build, there's no maintenance involved. It's definitely a massive value driver, particularly in the eyes of some other strategic partners out there. So it's a priority for us in many ways.

Speaker 2

The ultimate financial contribution will depend upon the final timing and size of the cavern that we build. Right now, we are just focused on making sure we get the permits, we can get to work.

Speaker 3

That's very helpful. And then maybe Satoro and Long Ridge. I'm curious if the capacity factor results from the last auction will impact negotiations that you're having with potential AI deals that are customers?

Speaker 2

Yes, definitely. Definitely. As the overall cost of power increases throughout the sector, I think it increases our negotiating leverage with behind the meter customers, whether it's data centers or it's any other behind the meter customer. We are talking to other non data center behind the meter customers. We have a escalating price environment.

Speaker 2

That's a good thing for us because our costs, given we own gas, are not going up and are very unlikely to go up. And so an increasing price environment with a lot of demand for efficient new power is a very good thing for us. So we're excited about

Speaker 3

it. That's very helpful. I appreciate it. And I will jump back in queue.

Operator

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

Speaker 4

Okay, great. Thanks. Good morning, everyone. So first on Jefferson, it's great to hear that you have 2 more contracts coming online next year that will generate $20,000,000 of EBITDA. But a few questions on this.

Speaker 4

When will both of these contracts commence? How should we think about the earnings ramp for these? Should we assume the full $20,000,000 run rate will kind of come through initially or will it take a quarter or 2 to fully ramp? And then what's the average duration on both of these contracts?

Speaker 2

Yes. They both good morning, Brian, by the way. They both commence next year. We have I'll go through the 2 contracts. The pipeline kind of expansion project commences on April 1 next year and that is contracted at minimum volumes representing EBITDA of $8,000,000 annually.

Speaker 2

So we would expect to report $6,000,000 in 2025 and then $8,000,000 in the years forward. The ammonia export project at Jefferson South commences on July 1 next year and that represents at minimum volumes $12,000,000 of annual EBITDA. So we'll experience $6,000,000 of that EBITDA next year and then the full $12,000,000 for the years to come. The pipeline contract is a 5 year contract. The ammonia export project is a 15 year contract, both at minimum volumes for their entire duration, they're great contracts.

Speaker 2

The capital required to build out the infrastructure for those is very low compared to the cash flows stipulated under the contracts. So we are excited. As soon as we start, those commitments kick in. There is no ramp up. It is automatic.

Speaker 2

And so we will be at the $20,000,000 EBITDA run rate with both contracts in place by July 1 next year.

Speaker 4

Okay. Super helpful. Switching gears a little bit, I guess, where are you in terms of refinancing the balance sheet? I know you did a couple of things down at Jefferson with the debt there, but what about the broader balance sheet? You obviously own 100% of TransStar with no debt there.

Speaker 4

So is there an opportunity to leverage that asset to bring down the cost of capital? And then how are you thinking about the preferreds over time?

Speaker 2

Yes. We are very mindful of it and I think it's an And we are And we are mapping out a highly accretive refinancing that would reduce borrowing costs, provide a lot more flexibility as well. Our capital structure was put in place when FIP was spun off from FTAI. And as a result, it's a slightly more restrictive capital structure than I think we'd like to have as a growth company and looking at a bunch of acquisitions. And so we have an opportunity to free up capital and give ourselves some more flexibility to do some really accretive things.

Speaker 2

Yes, indeed, TranStar is an amazing asset and it is certainly leverageable. I think we're going to be pretty prudent.

Speaker 1

I don't think you'll see us put a

Speaker 2

ton of debt on TranStar. We enjoy seeing the dividends out of TranStar coming up to our parent company. But there certainly is capacity to have a small amount of debt down at TransStar with very, very attractive terms. And so we may do that. But I think it's highly likely something will occur here in the second half of the year, certainly not this month of August, just given the typical slowdown, but post Labor Day between Labor Day and the holidays that's our target zone.

Speaker 4

Got it. Okay, great. And then just one more for me. So Ken, there's clearly a lot of irons in the fire and you're working on just a number of different initiatives across all the assets. So how are you allocating your time to effectively manage all these?

Speaker 4

And then I guess looking out over the next 12 to 18 months, what do you see as the top priorities?

Speaker 2

Well, look, it's good to see consistent growth across the entire portfolio and we continue to be focused on making good progress everywhere. That said, I think the things that represent the most meaningful step functions in revenue and EBITDA growth and therefore value creation are really 2 things. The first is accretive acquisition to TransStar. We're big fans of freight railroads. We have been for 15 plus years.

Speaker 2

And I think there are some really interesting opportunities that are presenting themselves here and an acquisition of TranStar would be highly accretive. And so as I mentioned in my discussion earlier, we have been staffing up with a handful of professionals who I'm excited to have coming onto the team. So we can make some real headway there. I think that's a big needle mover for TransStar. Secondly, our developments at Long Ridge.

Speaker 2

I mean, the capacity auction results alone are an indication, knock on wood of things to come. I mean, there is increasing demand throughout the nation, particularly in our region for power. And I think we've got one of the assets that is best positioned and our team is all over those opportunities. So I think it's those two things. Jefferson and Repauno are going to continue incredibly well.

Speaker 2

We've obviously got big construction projects ahead of us at Repauno. They're all meaningful, but my time, my energy is more and more focused on accretive acquisitions at TransStar and the big developments at Long Ridge.

Speaker 4

All right. I'll leave it there. Appreciate the time.

Speaker 2

Thanks, Ron.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Sharif Almagrabi from BTIG. Your line is open.

Speaker 5

Good morning. Thanks for taking my questions. So I have a couple on Long Ridge. First, if you could tell us when the swaps run off at Long Ridge and does 100% of your capacity there become merchant power once they do?

Speaker 2

Yes. The Yes. The swaps have an average of 3 to 5 years remaining on them. There are a number of different swaps with different maturities, but they're in that range of 3 to 5 years. And yes, we are a we actually today technically are a merchant plant.

Speaker 2

The swaps are a financial instrument. We're not committed to deliver power to any one counterparty. The swaps are more of a financial instrument. And that's actually an important thing when it comes to behind the meter users because we are free today to provide power to others. The swaps could stay in place or they could be terminated by us.

Speaker 2

And that will depend on the specific situation. But yes, the 3 to 5 years on the swaps and we certainly are free to provide power to anyone in the years to come.

Speaker 5

That's helpful. And just staying on Long Ridge, if you negotiate behind the meter data center power contract, I imagine there are issues you face related to things like backup power. So can you talk about those factors? And are the costs associated with something like backup power borne by FIP as the host?

Speaker 2

Yes. It depends. These if you've been seeing some of the recent announcements on data center developments and transactions, they kind of run the gamut. I think in our case, yes, we would more likely bear those costs and then we would generate higher income as a result. Things like disconnection from the grid, land availability, which we have a tremendous amount of at Long Ridge.

Speaker 2

And backup power are, yes, big priorities. We've been spending the past 6 months on backup power solutions. I think there are a handful of different solutions for us. We are in a region that has relatively uncongested power network and that's a very good thing. So we have a lot of flexibility for what we might be able to do in terms of having backup power available, selling power into the grid during times it's not needed and making it available to a data center when it is needed.

Speaker 2

The flexibility is really a key component of what Long Ridge has. So yes, we're mindful of all of those elements. It is certainly detailed and not without multiple work streams. But I do think when you marry up Long Ridge with a number of our other peers in the space, Long Ridge simply checks more boxes than a lot of the other situations out there.

Speaker 5

Thanks for taking my questions.

Speaker 1

Thank you.

Operator

Thank you. And now I'll turn the call back over to Alan Andrini for any closing remarks.

Speaker 1

Thank you all for participating in today's conference call. We look forward to updating you after Q3.

Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.

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