FTAI Infrastructure Inc. (FIP) Q3 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Q3 2022 FTAI Infrastructure Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Andreini. Your -- go ahead, sir.

Thank you, Michelle. I would like to welcome you all to the FTAI Infrastructure Third Quarter 2022 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 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. In addition, we will be discussing some non-GAAP financial measures during the call today, including adjusted EBITDA. The reconciliations of these -- 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.

Thank you very much, Alan. Good morning, everyone, and welcome to our inaugural quarterly earnings call for FTAI Infrastructure. This morning, we'll be discussing the financials as of September 30 on a consolidated basis and providing additional details of the operating and financial performance at each of our 4 core business units. Also, I'm pleased to report that we will be paying our first dividend as a stand-alone company with our Board authorizing a $0.03 per share quarterly dividend to be paid to shareholders later this month. I'm going to kick it off on Slide 2 of the earnings supplement. We posted a very strong third quarter financial and continue to generate momentum across our portfolio. Adjusted EBITDA for the third quarter came in at $33.2 million from our 4 core business units, up 25% from $26.5 million in the second quarter of 2022. We continue to see very good progress across our portfolio of companies and expect to generate meaningful growth in the quarters to come as our businesses ramp up operations following recently completed construction and as new contracts kick in. In the aggregate, we are reiterating our target of achieving annual adjusted EBITDA in excess of $200 million in 2023 from our existing platform with no additional investment required to meet that target. We are thrilled with having completed the spin-off of our infrastructure business and are excited about our new stand-alone infrastructure platform. As of the end of the third quarter, our company included a diverse portfolio of critical infrastructure businesses comprised of freight railroads, energy terminals and a power and gas company with aggregate assets of $2.6 billion. Each of our companies is well positioned for organic growth as projects previously under construction begin revenue service and has multiple initiatives to grow our revenue base take hold. There continues to be a dynamic time in the industrial and energy markets with inflation, volatile energy prices and the focus on energy security as prominent as ever, and our assets are extremely well positioned to capitalize on several opportunities. In summary, we believe the combination of diversity and growth across our company make FTAI Infrastructure unique investment platform, and we're excited about the future. Moving ahead to Slide 4. Slide 4 shows a snapshot of our financial performance at each of our 4 segments. I'll report more details in the following slides. So just some quick highlights for now. Transtar continues to be producer of cash flow for us, with EBITDA essentially unchanged for the quarter as slightly softer volumes experienced late in the quarter were offset by higher pricing. More importantly, we made substantial progress on growing our third-party business during the quarter and set the stage for a number of initiatives to kick in starting in January next year. Jefferson continued to ramp up utilization of its capacity, and we're looking forward to a big 2023 in Beaumont. Repauno, which will remain a smaller part of our portfolio in terms of EBITDA contribution for the remainder of this year and into early next year, has tremendous upside and is on the cusp of entering the long-term contracts for both its existing Phase 1 transloading system as well as the much larger Phase 2. Finally, our plant at Long Ridge achieved 100% capacity factor and generated cash flow from excess gas sales. All in, a very good quarter for us. Slide 5 shows the organization of our company and summary balance sheet. At the time of our spin-off from FTAI, now renamed FTAI Aviation, we issued $800 million in debt and preferred stock with proceeds used to repay then existing FTAI debt. We have ample liquidity today and will be putting in place a new $50 million revolving credit facility this quarter. Importantly, of our total $1.2 billion of debt shown on the balance sheet at September 30, approximately $500 million is issued at our holding company and $700 million is issued at Jefferson, which is nonrecourse to our holding company and all of our other businesses. We like to think of Jefferson debt more as an asset and a liability with extremely low interest cost, average maturity of 14 years and the flexibility to pay dividends from Jefferson with excess cash flow. We'll now turn to more detail on each of our 4 core business units. Starting with Transtar on Slide 7 of the supplement. Coming off a strong second quarter, Transtar posted solid EBITDA in Q3, generating $39.2 million of revenue and $18.4 million of EBITDA for the quarter. Slightly lower carload volumes were almost entirely offset by increased rate per car, resulting in both revenue and EBITDA for the quarter largely unchanged from the second quarter. Cash flow continued to be strong as the cash proceeds from the sale of noncore assets of $1.4 million offset the bulk of maintenance capital expenditures. We expect to continue to see cash from noncore assets offset the majority of our maintenance CapEx into 2023. More specifically on volumes. The key volume variance involved iron ore shipments at Transtar's Union Railroad in Pennsylvania, which were slower due to the U.S. Steel's temporarily idling of 1 of 2 blast furnaces at the Mon Valley Works facility. Specifically, U.S. Steel moved forward an outage from October to September, impacting shipments of ore late in the quarter. Pricing was stronger for the quarter with average rate per car increasing $599 to $631 per carload. Under our 15-year contract with U.S. Steel, pricing is set based upon an inflation-based index, protecting us from higher operating costs and were insulated from higher fuel costs through a 100% fuel pass-through mechanism. We have multiple initiatives under way at Transtar to drive incremental revenue and EBITDA. These programs, which were on Slide 8 of the supplement, are all focused on leveraging Transtar's existing assets and require little to no additional capital investment. Examples include Transtar's -- opening Transtar's in-house equipment maintenance facilities to external customers, expanding our base of third-party freight shippers, generating income from uses of our right-of-way and promoting leasing and development of over 700 acres of land that we own adjacent to our rail system. In the aggregate, we expect these third-party revenue opportunities to generate $30 million of annual EBITDA once fully implemented. Now on to Jefferson. Q3 EBITDA at Jefferson was $6 million, up 43%, versus $4.2 million in Q2 as utilization of our terminal capacity continued to steadily ramp up during the quarter. Crude volumes remained strong by a steady inbound flow of Utah yellow wax crudes, while volumes of refined products grew, reflecting a strong export market. During the third quarter, we renewed our existing contract with Exxon for rail shipments of refined products to Mexico. The new contract has a 5-year term and minimum volume commitments. We're also on track to commence terminal operations under our new 10-year contract with Exxon in January of 2023. We expect this contract to generate approximately $20 million of incremental EBITDA annually, bringing substantial committed throughput volumes to the terminal and providing a springboard for increased growth in volumes. We continue to be very bullish about Jefferson's prospects in the coming quarters and expect revenue and EBITDA to grow materially as we enter 2023. We have substantial assets with ample capacity for growth in place. As we continue to ramp up capacity, a meaningful portion of incremental revenue should drop to the bottom line as we leverage fixed costs. As shown on Slide 10, we estimate that even after the new Exxon contract commences in January, we will have capacity in place to more than double our volume and revenue. Now shifting to Slide 11. At Repauno, our key focus is on securing business in 2023 for our Phase 1 transloading system and commencing construction of our much larger Phase 2 system. For Phase 1, we plan this quarter to execute a multiyear contract with a counterparty that will generate steady positive cash flow for the terminal while Phase 2 is being built. The Phase 2 system is expected to triple our throughput capacity and quadruple our operating margins when it comes online in a couple of years. We have demand for multiple international off-takers, and our goal is to enter into long-term agreements with multiple parties in the coming months. Phase 2 is shovel-ready with engineering complete for the new storage tank, and all necessary permits have been obtained. We plan to finance all construction costs with tax-exempt debt. Also at Repauno, we continue to see increased interest in the renewable energy space with 250 or more acres primed for development. Our Clean Planet joint venture plans to build its first plastics recycling plant at Repauno, where Clean Planet will convert nonrecyclable plastics to renewable diesel and sustainable aviation fuel. We're expected to commence construction of the Clean Planet facility in early 2023 and be complete and operating in mid-2024. Moving on to Long Ridge. Long Ridge generated $11.3 million in EBITDA in Q3, up 53%, from $7.4 million in Q2. The bulk of our EBITDA was derived from power sales as we operated the power plant at full capacity during the quarter. At higher plant capacity factor, we consume more gas, but our team at Long Ridge managed to bring online additional gas production in excess of our plant's needs, allowing us to monetize the excess portion of gas production. We are taking a regularly scheduled maintenance outage of the plant in Q4 and plan to continue the pace of gas production to mitigate the impact of reduced power sales that we expect during the maintenance outage. Moving to Slide 13. Development at Long Ridge continues to be robust. During the quarter, we acquired 12,000 acres of additional gas assets in West Virginia, essentially doubling our total gas supply. This new gas supply can ultimately provide up to 150,000 MMBtu per day, with first production commencing in the middle of next year. At current gas prices, that equates to approximately $15 million of monthly EBITDA for Long Ridge. We expect to finance the capital expenditures required to develop gas production with additional debt at Long Ridge and currently are in discussions with multiple lenders. In July, we entered into agreements with Newlight Technologies for the construction of a new $300 million facility to be built on Long Ridge property, which will produce carbon-negative and biodegradable plastic products from natural gas. Long Ridge will sell power and natural gas to Newlight as well as provide land under a long-term lease. In addition, we expect to be an investor in the project if certain conditions are met. We expect the facility to be operational in 2024. And finally, we continue to progress efforts to be named 1 of 4 national hydrogen hubs under the Department of Energy's program to stimulate clean hydrogen production and use in key markets. Our plant is the first in America to blend hydrogen as fuel, and we believe we are well positioned to receive the hydrogen hub designation and benefit from access to federal grant funding to develop additional behind-the-meter customers. Finally, on Slide 14, we have highlighted our energy transition investments. To date, we've made investments or entered into partnerships with 3 companies that are developing technology and building facilities that decarbonize industrial production and recycle environmentally-sensitive products. With minimal capital, we believe these investments represent potentially tremendous upside, can be independently profitable in the near term and also can be highly complementary to our existing assets. Each of these companies will be building facilities at one or more of our existing terminals. Whether it's converting waste plastic to sustainable aviation fuel, recycling lithium-ion batteries or carbon capture, all represent massive macro opportunities with only a handful of players with established assets and proven technologies. Our goal is for 2023 to be a big year for our energy transition investments, and we look forward to communicating our progress to everyone in the quarters ahead. In closing, we are reiterating our target of reaching in excess of $200 million of annual EBITDA in 2023. At Transtar, we expect to see the impact of our third-party revenue initiatives to really take hold in the coming months. While at our Jefferson and Repauno terminals, the ramp-up of terminal capacity is continuing at a steady pace as new contracts kick in. With that, let me turn the call back to Alan.

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

[Operator Instructions] Our first question comes from Giuliano Bologna with Compass Point.

Congratulations on your first successful quarter out of the gate. But I'll kind of take this in a couple asset by asset. Starting with Transtar. I'd be curious, when we think about the $18.4 million of EBITDA that you generated in the quarter, is that a good sense of where kind of your floor EBITDA should be with the minimum volume commitments? And then as a little bit of a follow-on to that, I'm curious how soon the third-party initiatives can be contributable and scale as you start rolling them out?

Thanks, Giuliano. The -- at Transtar, the $18.4 million, I would say, if it's U.S. Steel, we're honoring just strictly the minimums under the contract, EBITDA would be 5% to 10% under that. So it's close, but it's not -- it's -- they're still moving volumes in excess of bare minimums under the contract. But it's a great contract, 15-year deal and minimum volumes set for the first 5 years of the contract. So we certainly expect to continue to exceed those minimums. On your second question, look, we expect all of the initiatives to be fully implemented in 2023, with some of them commencing as early as January. Particularly, we're opening up our 5 in-house equipment maintenance facilities starting January 1. So we should start seeing incremental revenue generated at the very beginning of next year. Otherwise, all of the other initiatives have already basically been turned on. I just think the impact is something that phases in. I mean we -- when we bought Transtar, I think they had between 10 and 15 third-party customers. We already have north of 30 third-party customers. And so we're already seeing some good progress on that front. Our goal is to have 50 to 60 third-party customers as we enter 2023. And so we staffed up that operation, the commercial function within the company and expect to continue to see good progress on that front.

That's great. And then shifting over to Long Ridge. It's great to see the power plant running at 100% capacity in the third quarter and stepping up EBITDA significantly to $11.3 million. I'd be curious what needs to happen to get the run rate closer to the $15 million a quarter or $60 million on an annualized basis for the power plant.

Yes. The way to think about Long Ridge is -- we generate revenue 2 ways, power sales and gas sales. So the $15 million is a combination of those 2 things. To achieve the $15 million, we typically would like to produce about 10,000 MMBtu per day of excess gas for sale into the market. During the third quarter, we produced about 3,000 MMBtu of excess gas. It accelerated as we made our way through the quarter. And as of today, I think we're producing about 82,000, 83,000 total MMBtu -- almost 10,000 MMBtu in excess of what we need. So that's a good thing. On the power sales, we generate revenue actually also 2 ways. One is from the specific sale of power under our long-term contracts, and the other is through capacity payments that we received. The capacity auction this year, as some people may know, came in at lower pricing than we had all originally expected. Historical pricing on capacity auctions for making your power plant available to provide power to the grid have ranged anywhere between $120 to $150 per megawatt day. This year, they're at $35 per megawatt day. That equates to about $15 million to $20 million in the aggregate of revenue that we hope to get back when capacity auctions normalize next year and in the coming years. But for this year, we are going to see lower capacity revenue. And so some of that was reflected in the third quarter as well.

That's great. And then pivoting over to the natural gas assets and the development there. You pointed out the $15 million monthly EBITDA potential once you're fully rolled out to 150,000 MMBtu per day, which is in 2024, and that comes up to about $180 million a year if you were to annualize that. I'm curious about 2 kind of different things. When we think about the near-term objective of 50,000 MMBtu per day in July '23, is it fair to assume that you guys would be roughly around like $5 million monthly on that number? Or are there some overhead costs that would pull that down? And then as an aside, I'm curious about how much debt you'll continue to raise to fund the overall project there.

Yes. Thanks. Good questions. The -- yes, that's correct. It's a pretty straight relationship between the amount of gas we produce and the incremental EBITDA. So the 50,000 MMBtu that would be about $5 million a month. And at 150,000 MMBtu will be a $15 million a month. Look, the acquisition of those gas assets, I mean, that was a big deal. One, we acquired a substantial supply of additional gas for the power plant. But more importantly, we have a lot more gas to access to sell into the market, and we continue to produce gas at $1.30, $1.40 an MMBtu. So at today's gas prices, which have been down over the past few weeks, that's still a tremendous profit potential. To commence development, there's some upfront CapEx that's required. I'm going to give you a range in terms of the capital. It's about $150 million to $250 million to really get that going and get to a steady state of producing sort of midpoint of the 50,000 to 150,000 MMBtu per day. It can all be debt financed. We are in the process of arranging the debt capital at the Long Ridge level, not at FIP, but down at Long Ridge. And we're discussing terms and negotiating with lenders. I think we'll have that debt in place prior to year-end or at least the commitments in place. Then it takes some time to set up the first well. We expect to be producing gas. We've right now targeted July 1. We hope to beat that. But that will be a significant adder to revenue and EBITDA at Long Ridge starting in the -- in full force in the third quarter of next year.

That's great. One thing I -- just a very quick note on that. When we're talking about the $15 million, that's the $15 million -- I think the natural gas initiatives are 100% owned as opposed to power plant is 50% owned, is that correct?

No. These will be in -- these will be financed in Long Ridge. So they will also be 50% owned. The capital will be -- the debt will be issued in the Long Ridge entity that we own 50% of it. So we would own 50% of that gas.

Got it. That makes sense. Very helpful. And then just the last one on Jefferson. I'd be curious about the impact and the relevance of terming out the rail to Mexico contract. And if that has a contribution -- additional contribution to EBITDA. And then the second part to that is with the first Exxon contract that's supposed to go live roughly around the end of the year, I guess, you're around 40%. And you guys are looking at kind of extending it to 90%, which is more than double that. I'd be curious kind of how you think about the walk and kind of what would drive your volume running from 40% to 90% over the next few quarters.

Yes, yes. I appreciate it. The renewed contract is just continued great validation. Obviously, we have a great partnership with Exxon, a new 5-year contract with minimum volumes. We're thrilled with the outcome. Yes, there is some incremental EBITDA from the terms of the old contract to the new contract that's mostly pricing-related. There are some price escalators in the new contracts that we'll see some incremental EBITDA. That contract will probably provide just north of $1 million of EBITDA a month. It provides a little less than $1 million of EBITDA a month currently. In terms of the ramp-up of the business, yes, you said it right. We view that as a great opportunity. We have the ability to double throughput with no need to build more assets and invest more capital. Look, I think there are -- there's a long list of opportunities to continue to increase throughput, and it's a momentum game. The relationship with Exxon and Motiva, who are 2 core customers continues to get better. Exxon, of course, is expanding their refinery in Beaumont, Texas, doubling consumption and output. So both input and output are increasing by 300,000 barrels per day. So you've got the total of 600,000 barrels per day of product. Even if we only get a small share of that additional volume, that would soak up a significant amount of the 50% opportunity that you referenced and we referenced in that bar chart in the Jefferson slides. Obviously, we're going to dialogue with a number of other folks, other refineries in the Beaumont, Port Arthur area. The yellow wax crude movements continue to increase, kind of at a point where we're in the low teens of yellow wax crude trains per month. And so that's a good thing. We expect that to continue to be strong, steady at a minimum and hopefully continue to grow. And finally, all of the clean fuels -- I mean there's a significant continued push on whether it's hydrogen-based fuels or renewable fuels. The government passing a series of incentives for the production of renewable fuels and clean hydrogen, only increases the tailwind to us. We're in a dialogue with a number of parties about either the construction of facilities or otherwise, just transloading renewable diesel, sustainable aviation fuel and things like ammonia and other hydrogen-based products. And so look, I think there's a long list of opportunities. That's what we need. The team at Jefferson is doing a great job executing. And as we make our way into 2023, I think we're well positioned to continue to win a lot of business.

That's -- I just had one clarifying question just to make sure I really clarified or not. I've asked a lot of questions, so I'll jump back into the queue after this. But when I think about the $15 million we got to EBITDA from the natural gas initiatives, that's at the asset level, so you would get really half of that on a -- on an FIP basis. Is that the right way to think of that?

That's correct.

Our next question comes from Sherif Elmaghrabi with BTIG.

So you talked about the projects being fully funded. So I'm just wondering how should we think about maintenance CapEx across the segments going forward?

Very low. I mean Transtar's maintenance CapEx is effectively 0 in that noncore asset sale proceeds offset maintenance CapEx. In the absence, Transtar's maintenance CapEx would be $5 million or $6 million or so, so -- but we generate that amount in cash flow from noncore assets. And so it's 0. Jefferson, the assets are very, very new. And so it's another maybe $5 million of maintenance CapEx at Jefferson. Most of the maintenance capital at Long Ridge is already paid for and warrantied. So when we take any kind of a maintenance outage, any parts replacement or what have you are already paid for. Also, it's brand new. And then finally, Repauno, again, similarly, brand new. Our one storage facility is an underground cavern. It requires 0 maintenance. And that's the beauty of the -- of where we are in the development stage of a lot of these companies. They're so young that we just don't have a tremendous amount of maintenance capital, and we don't envision having much for the years -- certainly for the near years to come, next 2 to 3 years. So I would say average, maintenance capital for the assets today that are in place, in the aggregate, it's probably $5 million.

All right. That's helpful. And then for the Clean Planet JV, are you aware if anything like the sustainable aviation fuel is eligible for tax credits under the Inflation Reduction Act? And can you quantify what that might look like?

It is. But one of the things real like about Clean Planet, though, is its business model doesn't rely on incentives and tax credits and what have you. What a lot of these companies do is they ship their product out to California to obtain low-carbon fuel, standard credit and what have you. We don't have to do that at Clean Planet. So we're just going to supply the local market with the product. We are eligible for some credits. The way to think about the Clean Planet business model is these facilities are built slightly smaller because they need to be regionally positioned, the business involved aggregating waste plastics and then processing it into sustainable aviation fuel. And so you want to build these facilities close to population centers where the waste plastics are. Philadelphia is a great market for that. We've also got the Delta Airlines refinery right around the corner from us -- right around -- across the river. And so we've got a great counterparty for producing sustainable aviation fuel. Each facility costs about $50 million to build, and they are entirely eligible for tax-exempt financing. And so the costs can be leveraged materially. Without any incentives, each facility makes at today's pricing of SAF and renewable diesel about $15 million of EBITDA. That is the rare species in the clean fuel space, finding things that generate that kind of profitability without any incentives. The simple reason for that is that the plastic supply is free. It's a waste product and otherwise needs to be disposed in landfills. And the collection companies and the waste management companies have to pay the landfill of the product. So they'd be much more happy to just give it to us for free. In Philadelphia, we have 3 deals already with -- for supply. And so we've managed the supply side of things, and that's frankly the most complicated part of the business. So $15 million off of the $50 million investment, that is before any incentives. The incentives are helpful. There are another $1 million to $2 million of EBITDA. The incentives are more potent in the hydrogen space. That was a very big boost for production of clean hydrogen. The Clean Planet business doesn't involve hydrogen. It is slightly more straightforward process. So the incentives aren't quite as compelling, but they're still meaningful. And yes, of course, we'll be eligible to obtain those credits.

At this time, there are no further questions. I would now like to turn the conference back to Alan Andreini for closing remarks.

Thank you all for participating in today's conference call. We look forward to updating you after Q4.

This concludes today's conference call. Thank you for participating. You may now disconnect.