Earnings Call Transcript - FIP Q2 2024

Operator, Operator

Good day, and thank you for standing by. Welcome to the Second Quarter 2024 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 session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speakers today, Alan Andreini, Investor Relations. Please go ahead.

Alan Andreini, Investor Relations

Thank you, Victor. I would like to welcome you all to the FTAI Infrastructure second quarter 2024 earnings call. Joining me here today are Ken Nicholson, the CEO of FTAI Infrastructure; and Scott Christopher, the company's CFO. We have posted an investor presentation and our press release on our website, which we encourage you to download if you have not already done so. Also, please note that this call is open to the public in listen-only mode and is being webcast. In addition, we will be discussing some non-GAAP financial measures during the call today, including adjusted EBITDA. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Ken, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures in the 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.

Ken Nicholson, CEO

Okay. Thank you, Alan, and good morning, everyone. This morning, we will be discussing our financial results for the second quarter 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. Now on to the results. We continued strong momentum in 2Q, recording adjusted EBITDA prior to corporate expenses of $41.8 million, up 15% from the second quarter of 2023 and up 12% sequentially from the first quarter 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 of 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, whether it is new energy flows through our Jefferson and Repauno assets, data centers and surging demand for power at Long Ridge or a 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 an excess of $200 million 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 $22.1 million of adjusted EBITDA. Carloads for the quarter held steady, while average rates came in at another new record. The second quarter represented the first full quarter of operations at a railcar repair facility on the Union Railroad in Pittsburgh. 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 third-party customer base at Transtar adding a number of new customers in Q2. At Jefferson, EBITDA was $12.3 million 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 to start construction on our Phase 2 cryogenic tank in this third quarter. 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 ten 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 million of incremental EBITDA for Long Ridge or approximately $16 million for our 50% share of the asset for the 2025 to 2026 capacity season. Briefly on to the balance sheet. We had total debt of $1.6 billion at June 30, and $564 million of debt was at the corporate level, while the rest of our debt was at our business units. Transtar continues to be completely debt-free, while approximately $948 million of debt was at Jefferson and $50 million was at Repauno. The Jefferson financing that we completed in Q2 enabled us to accomplish three things: First, we've refinanced a small portion of existing debt coming due next year. Second, we funded construction activity in connection with two 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. 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 Transtar on Slide 7 of the supplement. Transtar posted revenue of $45.6 million and adjusted EBITDA of $22.1 million in Q2 compared with revenue of $46.3 million and adjusted EBITDA of $21.7 million in Q1. Carload volumes held steady while average rates registered a new record of $667 per carload. We expect the overall environment for carload to remain strong during the second half of this year with U.S. steel production levels 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 Transtar, we're making good progress on our various initiatives to drive incremental revenue and diversify our customer base. 2Q was our first full quarter of operations at our new railcar repair facility on our Union Railroad. During the quarter, we handled a total of 816 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 1,800 cars per quarter. During the quarter, we continued to add new third-party customers and expect to add 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. The extension provides Transtar with additional commercial opportunities that 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 one or more opportunities in the coming quarters. Now on to Jefferson. Jefferson generated $21.2 million of revenue and $12.3 million of adjusted EBITDA in Q2 versus $18.6 million of revenue and $10.1 million of EBITDA in Q1. Both throughput volume and revenues came in at new records. Approximately two-thirds of our volume for the quarter was in refined products with the other one-third in crude oil. We generate higher rates for handling crude, so the revenue mix was approximately 50-50. We continue to see a pickup in volumes of waxy crude from Utah and are bullish about the future. In 2Q, Jefferson became the first terminal in the United States to load waxy crudes for export. Following that successful initial ship loading, the customer requested three 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. Two recently executed long-term contracts will commence in 2025, representing $20 million of annual EBITDA. One 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. More importantly, we are now currently negotiating additional contracts representing approximately $60 million 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 million 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 transloading up to 75,000 barrels per day of natural gas liquids, including propane, butane, and other products. Total construction costs are expected at $250 million to $275 million, 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 million of annual EBITDA once complete, significantly more than our initial expectation of $40 million based on contracts currently being finalized. In closing out with Long Ridge, Long Ridge generated $8.8 million in EBITDA in Q2 versus $10.4 million in Q1. Our power plant capacity factor was 69% 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. 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 that have 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-2026 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 million annually. Under the new pricing environment, our annual capacity revenue at Long Ridge will be $37 million for the 2025 to 2026 season with the incremental $32 million dropping entirely to the bottom line. 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 one 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 five 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. I'll turn the call back to Alan.

Alan Andreini, Investor Relations

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

Operator, Operator

Our first question will come from Giuliano Bologna from Compass Point.

Giuliano Bologna, Analyst

It's great to see continued performance making progress in all the assets. First question on Transtar. I'm curious what percentage of revenue was third party at Transtar when you first completed the acquisition compared to where third-party revenue stands today?

Ken Nicholson, CEO

Yes. Thanks, Giuliano. When we bought the business, it was largely almost entirely a U.S. Steel revenue base. About 95% of the revenue came from U.S. Steel. Today, we are in the low 80s. We're below 85% of revenue coming from U.S. Steel. And I think by next year, we'll 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 third-party customers. Obviously, if we're successful in making acquisitions, which is something we're increasing our focus on, we'd further diversify the revenue base.

Giuliano Bologna, Analyst

You mentioned the Transtar thing. You mentioned potential for Transtar. And I'm curious if there's any particular type of shortline you're looking to talk into with Transtar.

Ken Nicholson, CEO

We're examining various opportunities. We tend to concentrate more on properties that share some regional similarities. Naturally, we prefer businesses that align with Transtar's model, specifically in large industrial switching lines. One area where we stand out as a buyer is our willingness to consider individual assets with significant concentration. For example, we might look at a rail asset primarily focused on agriculture or energy liquids. Regardless of our strategy, our strong foundation with Transtar and U.S. Steel enhances our overall revenue diversification. While others might avoid short-line railroads with higher customer or commodity concentrations, we actually find those situations more appealing.

Giuliano Bologna, Analyst

And then switching over to Repauno. Can you update us on the caverns approvals? And then I'm curious about the impact you think the cavern approvals could have on the value of Repauno.

Ken Nicholson, CEO

Well, it will be 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. I mean, look, it's a huge value driver. Some of the bigger players in the industry are well aware of the value proposition of cavern storage versus aboveground 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. The ultimate financial contribution will depend on the final timing and size of the cavern that we build. Right now, we are just focused on making sure we get the permits and we can get to work.

Giuliano Bologna, Analyst

And then maybe switching over to Long Ridge. I'm curious if the capacity factor results from the last auction impact negotiations that you're having with potential data center customers.

Ken Nicholson, CEO

Yes, definitely, definitely. 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 any other behind the meter customer. We are talking to other non-data center behind-the-meter customers. We have an escalating price environment, that's a good thing for us because our costs, given we own gas are not going up, and they're 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 it.

Operator, Operator

Our next question will come from the line of Brian McKenna from Citizens JMP.

Brian McKenna, Analyst

So first on Jefferson, it's great to hear that you have more contracts coming online next year that will generate $20 million of EBITDA. But I have a few questions on this. When will both of these contracts commence? How should we think about the earnings ramp for these? Should we assume the full $20 million run rate will come through initially or take a quarter or two to fully ramp? And then what's the average duration on both of these contracts?

Ken Nicholson, CEO

Yes. They both commence next year. We have— I'll go through the two contracts. The pipeline kind of expansion project commences on April 1 of next year, and that is contracted at minimum volumes representing EBITDA of $8 million annually. So we would expect to report $6 million in 2025 and then $8 million in the years forward. The ammonia export project at Jefferson South commences on July 1 of next year. And that represents minimum volumes of $12 million of annual EBITDA. So we'll experience $6 million of that EBITDA next year and then the full $12 million 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, the capital required to build out the infrastructure for those is very low compared to the cash flows stipulated under the contracts we are. We're excited. As soon as we start those commitments kick in, there is no ramp up. It is automatic. And so we will be at the $20 million EBITDA run rate with both contracts in place by July 1 of next year.

Brian McKenna, Analyst

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 Transtar with no debt there. So is there an opportunity to leverage that asset to bring down the cost of capital? And how are you thinking about the preferreds over time?

Ken Nicholson, CEO

Yes. We are very mindful of it, and I think it's an opportunity for us at some point here in the second half of 2024. Strong momentum in the business, contracted cash flows, it's a very good credit story. 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 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. Yes, indeed, Transtar is an amazing asset, and it is certainly leverageable. I think we're going to be pretty prudent. I don't think you'll see us put a 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 Transtar at 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.

Brian McKenna, Analyst

And then just one more from me. So Ken, there's clearly a lot of irons in the fire, and you're working on a number of different initiatives across all the assets. So how are you allocating your time to effectively manage all of these? And then looking out over the next 12 to 18 months, what do you see as the top priorities?

Ken Nicholson, CEO

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 two things. First is accretive acquisitions of Transtar. We're big fans of freight railroads. We have been for over five years. And I think there are some really interesting opportunities that are presenting themselves here, and an acquisition of Transtar would be highly accretive. As I mentioned in my discussion earlier, we have been staffing up with a handful of professionals who I'm excited to have coming on to the team so we can make some real headway there. I think that's a big needle mover for Transtar. Secondly, our development at Long Ridge. I mean the capacity auction results alone are an indication, knock on wood, of things to come. 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. We've obviously got big construction projects ahead of us at Repauno, and they're all meaningful. But my time and energy is more and more focused on accretive acquisitions at Transtar and the big developments at Long Ridge.

Operator, Operator

One moment for our next question. Our next question will come from the line of Sherif Elmaghrabi from BTIG.

Sherif Elmaghrabi, Analyst

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?

Ken Nicholson, CEO

Yes. The swaps have an average of 3 to 5 years remaining on them. There are a number of different swaps with some different maturities, but they're in that range of 3 to 5 years. And yes, we are — we actually, today, technically are a merchant plant. 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, depending on the specific situation. But yes, 3 to 5 years on the swaps, and we certainly are free to provide power to anyone in the years to come.

Sherif Elmaghrabi, Analyst

That's helpful. And just staying on Long Ridge, if you negotiate a 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?

Ken Nicholson, CEO

Yes. It depends. If you've been seeing the recent announcements on data center developments and transactions, they 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, and backup power are big priorities. We've been spending the past six months on backup power solutions. I think there are a handful of different solutions for us. We are in a region that has a 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. The flexibility is really a key component of what Long Ridge offers. 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 compare 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.

Operator, Operator

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

Alan Andreini, Investor Relations

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

Operator, Operator

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