FTAI Infrastructure Inc. Q1 FY2023 Earnings Call

Hello. Thank you for joining us. Welcome to the FTAI Infrastructure Q1 2023 Earnings Conference Call. Currently, all participants are in listen-only mode. Following the presentations, we will have a question-and-answer session. I would now like to pass the conference over to your speaker, Alan Andreini. You may begin.

Thank you, Towanda. I would like to welcome you all to the FTAI Infrastructure first 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 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.

Thanks, Alan, and good morning, everyone. This morning, we will be discussing our first quarter financial results and also providing an update on the latest developments at each of our business segments. For this call, I’ll be referring to the first quarter supplemental materials that were recently posted to our website. Before we get to the financials, I’m pleased to report that we will be paying our third dividend as a standalone company with our Board authorizing a $0.03 per share quarterly dividend to be paid on May 26th to the holders of record on May 15th. Now on to the financials. We posted a strong first quarter financially and continue to generate momentum across our portfolio. Adjusted EBITDA for the quarter came in at $30.1 million prior to corporate expenses, up sequentially from $9.5 million in the fourth quarter of 2022. In comparing our two most recent quarters, it’s important to remind everyone that our fourth 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 four 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 million 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 $17.2 million for the quarter, up 27% from the fourth quarter of last year. 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 reflected an 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 multiyear tolling contract on April 1st. With the new tolling contract in place, we expect Repauno to generate an operating profit going forward. And finally, at Long Ridge operations returned to normal after the fourth quarter outage and we recorded $11.3 million of adjusted EBITDA. All in, a very good quarter, setting the stage for continued growth ahead. Briefly on the balance sheet. We ended the quarter with $40 million of cash. In the aggregate, we had $1.3 billion of debt shown on the balance sheet at March 31, approximately $515 million of which is issued at or guaranteed by our holding company and approximately $750 million 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 extremely 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. 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 Transtar on slide seven of the supplement. Transtar posted revenue of $41 million and adjusted EBITDA of $17.2 million in Q1, up from revenue of $35.8 million and adjusted EBITDA of $13.5 million in Q4 of last year. Both carload volumes and average rate per carload were higher for the quarter as U.S. 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 million of incremental EBITDA opportunities annually with little to no additional investment. Now on to Jefferson. Jefferson generated $19.1 million of revenue and $6.5 million of adjusted EBITDA in Q1, compared to $15.5 million of revenue and $4.5 million 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 billion 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. While business grows at Jefferson’s Main Terminal, we also made solid progress on our recently acquired nearby property in Beaumont. We’re seeing multiple opportunities for the storage, transloading 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 million of opportunity for incremental EBITDA. Shifting to Repauno. We commenced on April 1st, our multiyear contract to transload natural gas liquids using our Phase 1 system. The contract, which is with one of the world’s leading trading companies, has minimum volume commitments and does not expose Repauno’s 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 a tolling contract and not something we expect to reoccur. With Phase 1 having commenced, Repauno is now focused on securing business for our larger Phase 2 tranloading system. As detailed on slide nine 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. 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 $11.3 million in EBITDA in Q1, up from an adjusted EBITDA loss of $6.6 million in Q4, which included the power plant outage that persisted for the bulk of the fourth quarter. 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. As we look to the remainder of 2023, we expect both plant operations and gas production to be stable, while we progressed a number of initiatives to increase revenue and profits. 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’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.

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

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

Good morning and great to see the recovery in Transtar and Long Ridge this quarter. Starting off on the Transtar side. I’m curious if U.S. Steel was back up to full capacity now and related to the U.S. Steel topic, I’m curious if there are any other business opportunities that Transtar can tap into with U.S. Steel?

Yes, Giuliano. Thank you. The blast furnaces are fully operational again, and everything is back to stable and normal conditions. However, there are still growth opportunities for Transtar. U.S. Steel supplies raw materials and distributes finished steel products through three main methods: primarily by rail, then by marine freight using barges, and lastly by truck. I believe the most significant opportunity for Transtar involves shifting freight from trucks to rail, as rail is significantly more efficient. We have been collaborating with U.S. Steel on several new opportunities where we believe we can help them save costs, and I am confident that we will achieve some of these opportunities this year. I anticipate that there is a potential for 10% to 15% additional revenue from our existing operations by converting trucked freight to rail.

That’s great. And staying on the Transtar topic, where do you stand on the initial third-party business opportunities that you’re working on that you mentioned should drive roughly $30 million of incremental EBITDA?

Yeah. I’d say it’s during the course of this year 2023, they are really in two primary categories. One 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 Detroit area on the Delray Connecting Railroad, that’s doing very well. That itself, just one transload facility, will contribute at least $1 million of revenue this year, probably up to $2 million. So we plan to open ideally dozens of transload 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 midyear. We have an existing facility that needs some refurbishment, but down in the Texas area in Longview, and that will be opening as well later this year. And so precise timing is probably roughly in the third quarter 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 fourth quarter, we should be in a pretty good place for both third-party business and the incremental repair revenue.

That’s great. And I think, Ken, you’re still running back up, EBITDA trends are in the first quarter, kind of before the outage we’re running, call it, $8.5 million to $9 million a quarter range with just the base U.S. Steel business, and the $30 million, I mean, that would add, call it, $7.5 million a quarter. I’m curious, I’m thinking about your ability to get to $25 million a quarter or $100 million run rate by the end of the year?

Yeah. Feel good about it. Really, if we did nothing, no more third-party customers and no car repair, the year should be about $80 million of EBITDA for Transtar, $75 million to $80 million. We’re running today just taking the first quarter, if you just annualize the first quarter, it was about 70%. And I just think with normal rate growth in the year ahead and some small incremental volume growth, the full quarter effect of all the blast furnaces being operational, that should be $75 million and probably closer to $80 million of EBITDA. So bringing in the car repair and third-party business incrementally to that, we should be at an annual level of $100 million to $110 million or your $25 million plus per quarter by the end of the year.

That’s great. And okay, where is the application stand for the incremental 20 megawatt operating opening up to 55 megawatts?

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 upgrade 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 million to $10 million of incremental EBITDA. So call it $10 million of EBITDA starting in July or August. We have half of that, of course, on our own P&L, so it would add $5 million to the Long Ridge numbers starting in the third quarter.

That’s great. And I’m curious where things stand regarding the prospects of behind-the-meter customers and if there are any active discussions ongoing at the moment?

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 the facility late this year. We have a handful of other very large prospects. These are prospects that each would require 500 megawatts of power. They’re significant. They are primarily focused on the data center space. There is significant demand for new data center capacity, and some of the bigger players, with the advent of AI and the demand for power, are accelerating their development plans. We’re in dialogue with all of the major players. 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 new light at some point in the next three to six months, and then typically, that would be a one- to two-year build before we start actually seeing the revenue from that project. But, obviously, it’s incredibly valuable once you have it in place.

That’s great. And when I look at Long Ridge you’re at $11.3 million for EBITDA this quarter, and that incremental, call it, $5 million, you are saying, 50% interest would get you up to, call it, $12.5 million per quarter. I’m curious what the drivers are to get to $15 million a quarter or $60 million a year run rate for Long Ridge?

Yeah. It is one or two 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 million 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 million. It’s just been an incredibly weak, the capacity auction market has been incredibly weak from our perspective. Meaning capacity revenues are well below where they have traditionally been. If that swings back in our favor then I think we’re right there next year with the $60 million annual run rate.

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, can you discuss the expected timeline to reach full capacity?

Yeah. I would say every month is growing. We averaged 163,000 barrels per day in the first quarter. This quarter to date, second quarter to date, which we’ve really had largely one month behind us, we’re in excess of 200,000 barrels. And so just to give you a sense of the momentum, we have capacity to handle in excess of 350,000 barrels per day. So we still have plenty of capacity. But, yes, we’re definitely seeing increased volumes as we’re swinging into the second quarter here, and the trend line is very encouraging. I would say there’s still excess capacity, and Exxon, as I said in my comments, is 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. But I like the momentum and the current run rate and like what we saw in April.

That’s great. 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 is expected in the near term?

I’ll describe it a little bit. It’s a significant site, totaling about 600 acres, for which we paid less than $25 million. The site has two existing major tenants and around 200 acres available for development. It’s located across the river from Jefferson’s Main Terminal. The two tenants have some minor freight movements, and we provide services to them, which means there are no net operating expenses associated with the site. This does not impact our ownership costs, nor does it generate additional revenue or EBITDA for us, but it represents considerable development potential. There is no required capital expenditure to maintain the site. Similar to our approach at Repauno, we won’t invest capital into this site until we have a contract that justifies it. I believe that in the coming months, we will secure our first contract with a third party for some transloading business, which will be the first of several opportunities. We purchased this site with a set of opportunities that we had evaluated and are now pursuing. I expect we will have one of these contracts in the relatively near term, which could yield between $5 million and $10 million of incremental EBITDA and likely require a capital investment of around $30 million to $40 million. However, we won’t invest any capital until we have secured business.

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

The best way to understand it is that increased volumes, assuming the same rate per barrel, will naturally lead to increased revenue, while our costs remain mostly fixed. This means that additional revenue effectively contributes directly to our profits. To provide some context, we averaged 163,000 barrels per day in the first quarter, at an average rate of $1.30 per barrel. This rate is influenced by a mix of revenue streams, including storage and throughput, but to keep it straightforward, at 163,000 barrels and $1.30 per barrel, we generated approximately $19 million in revenue and $6.5 million in EBITDA. We have the capacity to handle between 350,000 and almost 400,000 barrels per day. If we were to double our capacity from the 165,000 barrels we achieved in the first quarter to about 300,000 barrels while maintaining the same $1.30 rate, we would reach an annual run rate of about $80 million. This would result in roughly $20 million in EBITDA for the quarter, as a large part of our expenses are fixed and do not increase with volume growth, leading to about $19 million to $20 million in quarterly earnings. As mentioned, the 163,000 barrels we recorded in the first quarter is below our current levels, and we observe strong positive momentum. The journey to reach over 300,000 barrels per day involves a process, but I am optimistic about the momentum we have. Currently, we are operating above 200,000 barrels per day, so we are progressing well. I believe it will mainly take the second quarter and possibly into the third quarter to reach that target.

That’s very helpful. And then switching over to Repauno. I’d be curious where EBITDA should go, now that the contract went live on April 1st. I realize it’s probably will be the transition during the first quarter of the contract went live. I’m curious where the quarterly or annual run rate should be?

Our target for Phase 1 is $10 million of annual EBITDA. The current contract covers about two-thirds of our total Phase 1 capacity, meaning it likely represents closer to $5 million of annual EBITDA. We expect to secure additional capacity for Phase 1 in the second quarter, which should help us reach the $10 million annual run rate. The first quarter was a bit frustrating as we had to invest in preparations for the new contract and had to sell some inventory, resulting in some unfavorable market timing. However, that is now behind us. With the existing contract, we will definitely be profitable. If we can secure additional volumes to fully utilize the Phase 1 capacity, we should be able to achieve approximately $2.5 million in quarterly EBITDA or a $10 million annual run rate in the second half of this year.

That’s great. And then I’d be curious where you are on the prospects for securing the two sides for Phase 2. And if there is any CapEx at Repauno other than the Phase 2 build-out?

Yeah. No additional CapEx at Repauno. 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 dialogue with about volumes for Phase 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 offtaker. The offtaker is securing volumes of butane and propane from the Marcellus and Utica, and then they are, of course, securing their own offtake in the European and African markets. I would say we’re very close with one brand name, very well-known player, and that’s been several months of dialogue and back and forth. We have two 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 five years to ten 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 one. Once we have one, we’ll commit to the project and go ahead and finance it and start construction. It’s ready to go. It is permitted, engineered, and ready to go. We just want to make sure we have the contract in hand before we commit the capital.

That’s great. And then kind of switching right on the assets or the specific assets. I’m curious when you think the company will be in a position to start paying down debt and reducing leverage.

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 also 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 fourth quarter and swing into 2024. The ultimate plan would be by the time we get to mid-2024, we’re in a position to refinance the entire balance sheet, and that, I think, will 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 million 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 if 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.

That’s very helpful. And looking across the board, are you looking at any other M&A or JV opportunities at the forming assets at this point?

Yeah. 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. 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, and that’s a nice thing. Nice tuck-in opportunities or some that are slightly more chunky but highly complementary with Transtar. So we’re always looking at stuff, and yeah, I’m pleased that we’re seeing a little bit more liquidity or fluidity in the M&A market and expect that to last for the bulk of 2023.

That’s great. Thank you for answering several questions, and I appreciate all the responses. I will return to the queue. Thank you.

No problem. Thanks very much.

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

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

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