FTAI Infrastructure Q3 2023 Earnings Call Transcript

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October 27, 2023

There are 4 speakers on the call.

Operator

Good day, and welcome to the Q3 2023 FTAI Infrastructure Earnings Conference Call. As a reminder, this call is being recorded. I would now like to turn the call over to Alan Andrini, Investor Relations. You may begin.

Speaker 1

Thank you, Michelle. I would

Speaker 2

like to welcome you all to the FTI Infrastructure Third Quarter 2023 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 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.

Speaker 2

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 and filed with the SEC. Now, I would like to turn the call over to Ken.

Speaker 1

Thank you very much, Alan, and good morning, everyone. This morning, we'll be discussing our Q3 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 3rd quarter supplemental materials recently posted to our website. To kick I'm pleased to report that our Board has authorized a $0.03 per share quarterly dividend to be paid on November 16th to the holders of record on November 9th. Under the financial results, adjusted EBITDA prior to corporate expenses came in at $32,200,000 for the quarter $98,800,000 for the 9 months year to date.

Speaker 1

Our year to date results are up 25% versus last year with each of our 4 segments demonstrating growth. Reflecting on the results, while the headline 3rd quarter numbers may not Show it, I believe this was our most productive quarter since the spin off of our business in August of last year. And our accomplishments during the quarter as it relates to new executed contracts At the stage for a strong Q4 and 2024 year ahead. At each of our segments, we continue to advance a number of growth initiatives And more importantly executed a number of long term contracts, several of which have already begun to contribute to our revenue and earnings here in 4Q. Looking forward, we are targeting adjusted EBITDA to grow meaningfully in the coming quarters based on these events.

Speaker 1

In the near term, we expect adjusted EBITDA to be up 10% to 20% sequentially in the 4th quarter and we continue to target reaching a run rate of $200,000,000 of annual adjusted EBITDA from our segments early next year with no additional capital required to meet that target. In terms of the highlights of each segment, TransStar reported $17,400,000 of adjusted EBITDA, down a bit from an extremely strong 2Q and up from Q1 of this year. Operationally, Transur had an excellent quarter and were it not for the United Auto Workers strike that commenced late in the quarter and higher fuel costs for which we will be reimbursed in the coming month, The quarter would have been more in line with 2Q results. At Jefferson, EBITDA grew as the ramp up of our business continues. More importantly, during the quarter, we executed a number of new contracts representing an excess of $20,000,000 of incremental adjusted Annual EBITDA.

Speaker 1

A portion of these contracts commenced this month and will contribute to our results in Q4 and going forward. At Repauno, adjusted EBITDA loss continued to narrow while we made significant progress on our Phase 2 expansion project that will transform our business And long term EBITDA generation. And finally, at Long Ridge, normal operations continued and we reported $8,000,000 of adjusted EBITDA, reflecting minimal third party gas sales given the lower overall market prices for natural gas. Briefly on the balance sheet. In the aggregate, we have $1,300,000,000 of debt at September 30 and no near term maturities.

Speaker 1

Approximately $750,000,000 of debt was at our Jefferson segment 25 was at Repauno. At both of these entities, debt is non recourse to the parent, carries low coupons and long duration and is not callable in the event of the sale of the business. In essence, we view this debt as an asset. In addition, our TransStar Freight Rail business is completely debt free, meaning all cash generated at the business can be distributed up to FIP with no limits or restrictions. I'll spend a few minutes providing more details on each of our segments now and then plan to turn it over to questions.

Speaker 1

I'll start with TransStar on Slide 7 of the supplement. TransStar posted revenue of $41,900,000 and adjusted EBITDA of $17,400,000 in Q3, down from revenue of $42,500,000 and adjusted EBITDA of $20,300,000 in Q2. Carload volumes grew for the quarter while average rate for Carlow declined as the mix of freight was impacted somewhat with higher margin projects related to the auto sector being softer in the quarter as a result of the UAW Work stoppage. Operating expenses for the quarter were higher as a percentage of revenue driven primarily by events that we believe were unique. The largest variance was in fuel expense, which was higher given the overall higher price of diesel during the quarter.

Speaker 1

While we pass through this cost To our customers, we receive reimbursement a few months after incurring the expense. So we will see the fuel effect reverse itself here in Q4. Away from U. S. Steel, we also continue to make good progress on multiple initiatives at TransStar to driving incremental third party revenue and EBITDA.

Speaker 1

The bar chart on the right of Slide 7 of the supplement shows the incremental EBITDA we expect from each initiative. In total, we expect these programs to represent approximately 7 point $5,000,000 of quarterly adjusted EBITDA or $30,000,000 on an annual basis commencing in 2024. Now on to Jefferson. Jefferson generated $16,600,000 of revenue and $7,800,000 of adjusted EBITDA in Q3 compared to $17,100,000 of revenue and $7,100,000 of EBITDA in Q2. The P and L at Jefferson continued to demonstrate a shift to increased volumes of refined products versus crude oil.

Speaker 1

Transloading rates for refined products are typically lower on a per barrel basis for Jefferson, given the process involves No heating or blending as crude often does, but refined products also generate a high margin since the operating costs associated with refined products are quite low. For Q3, you'll see we posted lower revenue due to this dynamic, but continue to grow EBITDA due to the lower operating expenses. But more important development during Q3 was on the new business front. We secured 3 new contracts at Jefferson, which in total represent $20,000,000 of long term annual adjusted EBITDA. While the 3rd quarter did not contain any EBITDA from these new contracts, 3 of the 2 contracts have already commenced at this stage in Q4.

Speaker 1

So we'll see the positive benefits in our Q4 results ahead. The 3rd contract is at our newly acquired Jefferson South site, We secured a new 15 year contract for the transloading and export of hydrogen based clean fuels commencing in 2025. Another highlight at Jefferson is the recent return of Canadian crude volumes after almost 2 years of absence. Canadian Consistent flow from the Canadian market as rail volumes pick up and pipelines out of the region are constrained. In summary, we're bullish on Jefferson And continue to execute on the lease up of the remainder of our capacity.

Speaker 1

We're seeing something we haven't we've been waiting to see for quite a while now with the terminal competition for our capacity. At Repona, we continue to narrow our operating loss. Our Phase 1 multiyear contract to translate natural gas liquids is continuing smoothly. That contract with an investment grade counterparty has minimum volume commitments and does not expose our PONO to commodity prices. With this Phase 1 having commenced, our PONO is finalizing Contracts for its much larger Phase 2 transloading system.

Speaker 1

As detailed on Slide 9 of the supplement, our Phase 2 system is expected to materially increase Our storage throughput capacity when it comes online in 2 years, in the aggregate, we expect Phase 2 to cost approximately $200,000,000 to build and to generate in excess of $40,000,000 of annual EBITDA once complete. Moving on to Long Ridge. Long Ridge generated $8,000,000 in EBITDA in Q3 versus $10,400,000 in Q2. Power plant operations were steady while gas production continued to be managed down during the quarter in the currently lower gas pricing environment. At gas prices of under $1.25 per MMBtu, our profit on third party sales is less impactful, so we have deliberately limited production and opted to keep outage here in the Q4, so our results will see some impact from that outage, but we expect the outage to be routine with the next outage scheduled for the late spring.

Speaker 1

At Long Ridge, we're focused on wrapping up financing for our recently acquired gas resources in West Virginia. We expect to have final debt commitments in place here in Q4 at an extremely attractive rate, so that positions us well to start gas production when prices recover. We also continue to progress a number of initiatives at Long Ridge. We're expecting final approvals in the coming months for the up rate 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 $5,000,000 to $10,000,000 annually based upon current forward curves for the price of power.

Speaker 1

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. To wrap up, we're pleased with our direction as we enter the final quarter of 20 And I'm excited about the things to come in the next year ahead. With that, let me turn the call back to Alan.

Speaker 2

Thank you, Ken. Michelle, you may now open

Speaker 1

the call to Q and A.

Operator

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

Speaker 3

open. Good morning, Emil. Congratulations on the progress contracting up assets this quarter. One thing I'd be here to kick it off here is, with all the new contracts at Jefferson, can you predict where EBITDA will shake out In 4Q of this year.

Speaker 1

Hey, good morning, Joanna. Yes, we feel very comfortable that Jefferson is going to be in the double digits in the 4th quarter, probably in the range of $10,000,000 to $12,000,000 in 4Q and then I think it grows from there Commencing Q1. As I mentioned in my remarks, 2 of those three contracts have already kicked in. They represent about Half of the $20,000,000 I described 3 contracts, 2 represent about $10,000,000 or $11,000,000 of EBITDA and the third represent about $9,000,000 of EBITDA. So those 2 representing annual EBITDA of $10,000,000 to $11,000,000 have already commenced and so that will contribute into the Q4 EBITDA here.

Speaker 3

Very helpful. Just then shifting returns for Amit, I'm curious What do you think the auto strike impact will be in 4Q this year?

Speaker 1

Well, it's tough. We're encouraged we saw Ford reach a tentative deal with the UAW, GM and Stellantis Hopefully close behind. I'll tell you, look, the auto streak had an impact in Q3. I would expect at this point, the impact would be somewhat similar To Q4, it's not we don't have the crystal ball in terms of the timing of when that all gets resolved. But we're right now expecting the financial impact to be Generally similar to what it was in Q3, but I want to be clear that doesn't mean the financial results will be similar to Q3.

Speaker 1

Remember, at TransStar, It's fuel impact and a handful of other things that made Q3 a little bit softer. We Those things to reverse themselves and so we are targeting EBITDA levels even with the impact of the auto strike in Q4 to be much closer to Q2 levels Approximately $20,000,000

Speaker 3

Very helpful. And then on a similar topic, when do you expect the contract rate increases to kick in at Transur?

Speaker 1

Yes, we take annual rate increases and it's subject to an inflation based The metric, they do range depending upon the individual freight moves. They range from as low as a 5% annual rate increase to as high as a 12 Percent annual rate increase, those will all commence January 1. So we'll see the impact immediately in Q1. It's pretty significant. Just the rate increase alone is up to $5,000,000 of incremental EBITDA.

Speaker 1

That's the beauty of railroads. Pricing power It's a beautiful thing and every penny of price goes straight to the bottom line. We've been seeing some of that inflation in our costs Leading up to this, but we get the rate increase in Q1. And so that'll be a nice refreshing moment to start seeing higher rates as we enter

Speaker 3

Very helpful. And then, a bit more of a general question, but assuming Transcelera fully normalizes in 1Q Of 24, I assume the 2 Jefferson contracts are fully ramped up that are taken in during the Q4. When do you expect to be at the $200,000,000 EBITDA run rate?

Speaker 1

Our goal is to be there in Q1, dollars 50,000,000 of EBITDA in Q1 from the 4 segments. I think that's if we're not there, we're going to be very close to there. And I feel very comfortable that we'll be there by Q2. I think with Jefferson, we've got a pretty clear line of sight. I'll note with Jefferson, it's not just the 3 contracts we signed here in Q3.

Speaker 1

We are working on a significant contract at Jefferson that we're very hopeful we'll have executed here in Q4 that We start to contribute to Q1 and that would put Jefferson in a place where we are pretty close to our anticipated run rate for that whole asset. So our goal is to hit the $50,000,000 quarterly EBITDA, dollars 200,000,000 run rate at some point in Q1. If we aren't able to get there, I know we'll be very close and we'll head into Q2.

Speaker 3

Very helpful. And then, can you talk more about the U. S. And In light of all the currently announced production business in the region, are there any opportunities there for Sureguruption? Yes, the first one you asked,

Speaker 1

that would be a funny you asked, that is the that's The big next project for us and what we're hoping to get signed up this quarter. It's a pretty dynamic market out in Utah. Right now, there is when you just think about the scale of the market, total production in the basin is about 150,000 barrels per day of crude oil. The first 85,000 barrels stay local and feed the local refineries and anything in excess of that 85,000 is Exported out of the state and all that crude oil goes to the Gulf. So today you've got 65,000 barrels going to the Gulf.

Speaker 1

Production is increasing from 150,000 barrels per day to 300,000 barrels per day over the next 6 to 12 months. So you get a sense for The scale and all of that incremental 150,000 barrels are going to be exported to the Gulf. That's the equivalent of 3 trains per day. At Jefferson, we have the capacity to bring in roughly a train a day, maybe a little bit more of waxy Crude, it's a very high margin business for us because not only do we get the heating and unloading, but we get the blending as well because the crude is typically blended before it goes into a refinery. So, it's a rapidly developing market.

Speaker 1

There's been a lot of capital committed to More production and the expansion of the 2 major terminals out in the basin. And so we expect to see more product Flowing out of the basin as early as here in Q4 and certainly into next year and we're very hopeful that a big chunk of that volume comes to Jefferson.

Speaker 3

Very helpful. And I'm switching to Repauno. I'm curious if you'll be able to announce who the 3rd party entity is You signed a contract with?

Speaker 1

Well, I think what we'll certainly do is once that contract is signed, it's We're finalizing it right now. It's getting very close. We will certainly issue a press release to make sure people are aware that it's been signed. It's a very big development for Apanas. So Certainly something we will communicate once executed.

Speaker 1

Whether we can share the name of the counterparty, obviously, we'll need to get their permission to do so. I can tell you it is a very well known, large integrated energy company And investment grade and what have you, obviously, if we can share their name, we definitely will.

Speaker 3

That's And then I'm curious if you're still looking at tuck in acquisitions on the rail side with TransDAR and around Jefferson?

Speaker 1

We always are we're certainly always looking. That I will admit that market has been a little bit lighter. Capital markets and financing for acquisitions is slower these days. But yes, we're looking at One situation in the freight rail space that I think is exciting, could be an interesting fit for TranStar. And we're looking at a couple of opportunities in the terminal space that would be nice tuck ins with Jefferson or highly complementary to what we do at Jefferson.

Speaker 1

And Hopefully, those things come together, but we'll always be looking And hoping to add scale to our businesses through investments and acquisitions, I think we're just going to be cautious and conservative, of course, as we go.

Speaker 3

That's very helpful. I really appreciate the time and let me answer some questions and I will jump back in the queue. Thank you. Thanks.

Operator

Thank you. That concludes the question and answer session. I'd like to turn the call back over to Alan for any closing remarks.

Speaker 1

Thank you, Michelle, and thank you all for participating in today's call.

Speaker 2

We look forward to updating you after Q4.

Operator

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

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Earnings Conference Call
FTAI Infrastructure Q3 2023
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