Ftai Infrastructure Inc (FIP) 2024 Q3 法說會逐字稿

Hello and welcome to Ftai Infrastructure third quarter 2024 earnings call. (Operator Instructions)

I would now like to hand the conference over to Alan Andreini, Investor Relations. You may begin.

Thank you, [Twanda]. I would like to welcome you all to the Ftai Infrastructure third 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 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.

All right, thank you, Alan.

Good morning, everyone, and welcome to our third quarter 2024 earnings call. For the call today, I'll be referring to the earnings supplement, which you can find posted on 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 November 19 to the holders of record on November 12.

Now on to the results. We recorded adjusted EBITDA $36.9 million in the third quarter, a new quarterly record of 8% from the second quarter of 2024 and up 50% year over year from the third quarter of 2023. We're pleased with the results, but we're even more excited about the opportunities that lay ahead.

The third quarter was a significant one in terms of momentum we established across our companies with a number of events positioning us for substantial growth next year and beyond. Across our portfolio, we now have line of sight under executed contracts and commitments representing approximately $70 million of incremental annual EBITDA, which when combined with our current run rate represents total company annual EBITDA approximately $220 million.

And the pipeline for new business is as strong as ever. Today, we are pursuing more new business opportunities than any time since the spinoff of our company. If we're successful in converting these opportunities into contracted business, we estimate annual EBITDA potential in excess of $300 million. These estimates exclude the impact of any new investments or acquisitions we may act on such as tuck in acquisitions at Transtar or data center developments at Long Ridge.

In terms of the highlights of each segment, Transtar delivered another strong quarter, posting $21.1 million of adjusted EBITDA. Carloads and rates for the quarter held steady while third-party revenue continued to grow.

Our focus at Transtar is to maintain organic EBITDA growth in the range of 15% annually and drive further value creation through creative investments and acquisitions. We continue to actively pursue a number of acquisition opportunities and have added resources to the M&A team to ensure we are well positioned to act on opportunities as they arise.

At Jefferson, EBITDA was $11.8 million for the quarter. Construction of two contracted projects is proceeding on budget and on time for revenue service commencing the spring and summer of 2025. Once operational, these two projects will contribute a total of $20 million of annual EBITDA under 5-year and 15-year terms.

During '23, we also entered into advanced negotiations on a number of projects involving volumes of both conventional and renewable products. These new business opportunities that if successfully contracted represent another $60 million of annual EBITDA at Jefferson.

At Repauno, the third quarter was a pivotal one and with the execution of our first long-term contract for our Phase 2 transloading system. With the first contract in hand, we've commenced construction of the system and are in active discussions with several additional parties for the remainder of the system's capacity.

We plan to raise all financing for Phase 2 construction in the tax-exempt debt markets in the coming months. And the commercial landscape is extremely favorable positioning us to have multiple contracts in place by year end.

And finally, at Long Ridge, we generated $11.1 million EBITDA for the quarter, reflecting a nearly perfect capacity factor of 99%. I'll talk about our upcoming financing plans at Long Ridge here shortly but suffice to say we have ambitious plans for Long Ridge in the coming quarters and believe the asset has tremendous upside potential.

Onto the balance sheet. We had total debt of $1.5 billion at September 30, $560 million -- $567 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 $925 million of debt was at Jefferson and $44 million was at Repauno.

We're planning a number of creative debt financings in the coming months, and I'm going to briefly talk about each.

First, at Repauno, we will issue $300 million of low-cost tax-exempt debt to fund the Phase 2 construction. The financing is slated to be launched in November and should close in December, and we will fully fund all required capital needs.

Second, at Long Ridge, we're preparing to refinance existing debt, reducing our overall fixed charges, and providing meaningfully more flexibility. In conjunction with the Long Ridge financing, we plan to also convert our existing power sale hedges into new arrangements that reflect a higher price received for the power we generate and therefore results in higher cash flow at Long Ridge.

To explain this opportunity more specifically, at Long Ridge, we sell power today under a series of financial contracts or hedges that we entered into. At the time, we started construction and that were required in order to arrange the initial debt funding to build the power plant. Those hedges are still in place today and are set at a price equal to approximately $28 per megawatt hour. It figured well below current market prices.

In conjunction with the refinancing of our existing debt, we have an opportunity to reset the price of power by entering into new hedges closer to current market prices. Depending upon the final financing terms and pricing of the new power hedges, we anticipate the financial impact will be substantial. Our goal is to consummate the financing and new power hedges prior to year end.

And finally, upon completion of the Repauno and Long Ridge financings, both of which we expect to be creative and credit enhancing, we plan to refinance our corporate bonds and existing preferred to reduce fixed charges and increase cash flow after debt service for common shareholders.

I'm going to talk through the detailed results of each of our segments and then I will plan to turn it over for questions.

Starting with Transtar on slide 7 of the supplement, Transtar posted revenue of $44.8 million and adjusted EBITDA of $21.1 million in Q3 compared with revenue of $45.6 million and adjusted EBITDA $22.1 million in Q2. Carload volumes and average rates held steady for the quarter, and we expect the environment for volumes and rates to remain strong for the remainder of the year. Operating expenses were also stable as fuel costs and other material costs were largely unchanged for the quarter.

Third-party customer activity continues to grow with our rail car repair facility in Pittsburgh and new transloading locations all ramping up. At our transload facility in Michigan, we're completing an expansion this quarter to take the number of car slots for transloading from 15 slots to 90 slots as initial customer demand for truck to rail transshipments has exceeded our existing capacity.

All in, we're currently expecting fourth quarter EBITDA to come in higher than the third quarter EBITDA and anticipating maintaining a roughly 15% organic growth rate next year with incremental growth driven by M&A opportunities as they arise.

Now on to Jefferson. Jefferson generated $19.7 million of revenue and $11.8 million of adjusted EBITDA in Q3 versus $21.2 million of revenue and $12.3 million of EBITDA in Q2. Reduced volumes for the quarter were the result of lower refined products exports as Exxon performed maintenance at one of their Beaumont production units, as well as fewer crude oil trains which we now expect to receive in Q4.

Lower volumes had little impact on revenue, as all of our contracts contained minimum volume requirements which mitigated the majority of volume shortfalls. We expect throughput in the fourth quarter to return to over 200,000 barrels per day.

Our two contracts representing $20 million of incremental annual EBITDA commence in the spring and summer of next year, and we're currently in late stage of negotiations for additional contracts with multiple parties. They handle conventional crude, refined products, and renewable fuels. If we're successful in converting these opportunities to business wins, we'll post annual EBITDA excess of $100 million far exceeding our prior targets.

Now onto Repauno. We signed our first contract for our Phase 2 export system during Q3. We expect to execute a number of additional contracts during the fourth quarter.

Construction of the Phase 2 system has commenced. Assuming full utilization and rates consistent with those already executed, Phase 2 can contribute $60 million to $70 million of the annual EBITDA once complete.

Total estimated construction cost of $300 million will be funded in the tax-exempt markets, as I described earlier. In the current capital markets environment, we're expecting interest rates in the range of 5% to 6%, making the Phase 2 project highly creative for the equity value of Repauno. While Phase 2 remains our current priority, we're excited about the advancement of the next phase of Repauno, including development of additional underground storage for which we expect to complete permitting in the months to come.

Finally, closing out with Long Ridge. Long Ridge generated $11.1 million in EBITDA in Q3 versus $8.8 million in Q2. As I described, power plant capacity factor was 99 for the quarter while gas production continued to be managed down during the quarter in the currently lower gas price environment.

We're advancing a number of developments that have potential to significantly increase EBITDA and cash flow at Long Ridge. The recent capacity auction results take effect in June next year and represent a $32 million increase in annual revenue in EBITDA, or $16 million for a 50% share.

All indications are that capacity pricing will remain at higher levels for the years to come, driven both by the anticipated surge in demand for power by hyper scalers, as well as mandated retirements of coal-fired power plants. Higher capacity revenue together with the higher power sale revenue related to our previously described refinancing will be transformation of the cash flow profile and value proposition at Long Ridge.

Meanwhile, we continue to advance a number of initiatives including the uprate of the power plant of 505 megawatts and behind the meter projects, including most notably negotiations with data center developers. It's on the current state of discussions we anticipate entering into one or more transactions for data centers at Long Ridge during the first half of 2025.

To wrap up, we're pleased with the quarter and excited about the remainder of 2024 and the 2025 year ahead. Now I will turn the call back to Alan.

Thank you, Ken. [Twanda], you may now open the call to Q&A.

(Operator Instructions)

Giuliano Bologna, Compass Point.

Good morning. Congratulations on all the new initiatives that you're working on. Seems like there's been a lot of progress in the last couple quarters.

But as a first question, I'm curious if you can expand on the Long Ridge financing that you were talking about? And maybe give us a little bit of sense of where the new contracts get priced because it seems like all that potential accretion is incremental to the $20-plus million a quarter, $80-plus million annualized EBITDA that you know you're already talking about.

And in the supplements, so I'd be curious to see the other a sense of the that financing structure and also, what the site can look like there.

Yeah, absolutely. Good morning, Giuliano, and thanks for the question.

Yes, you're right. It will be meaningfully accreted to the cash flow generation and what Ftai would report for its 50% share.

Just to give you some context, as I said, when we first started construction of the Long Ridge plants, we raised $600 million of debt to fund construction. And with that debt, we entered into these power sale hedges to fix revenue and enhance the credit as part of required under the debt agreement.

As I described, those swaps were entered into at $28 per megawatt. Today, pricing is closer to $42 per megawatt. That price changes every day, but it's been steady in the low 40s now for a number of weeks and a few months.

Assuming we enter into new swaps at that $42 per megawatt hour level, the incremental EBITDA at Long Ridge is approximately $50 million annually, pretty significant. There is a cost to terminating the existing swaps, and so we would incur more than the refinanced amount of $600 million to fund the termination costs, but it is a highly creative transaction. The incremental EBITDA over time is well in excess of the incremental cost of financing and terminating those swaps, so it is a very financially attractive transaction.

I suspect the new debt will be placed between now and the end of the year. In isolation, we'll also reduce just the overall cost of borrowing. Our existing debt today is -- has a high handle on it on a blended basis, and we think we can be in the low 8s; if not, the high 7s on a pro forma basis so we expect that financing to be very accretive.

That's very helpful. I appreciate that.

And then they -- going over to the holding company level that your whole code debts obviously traded a lot better since it was issued a couple years back ago. I'm curious where you think you could refinance the 10.5% whole code notes today.

Yeah, I think if we did a refinancing right now, today, we could refinance with a 7 handle. Our bonds today have a 10.5% coupon. Our existing preferred stock is a 12.

So if we can refinance in the 7s in and of itself that's extremely attractive I think we do even better if we bring a transaction immediately after the Repauno and Long Ridge transactions are behind us because those are independently credit enhancing to the whole story. So that's our plan, the sequencing of the three transactions are Repaano and Long Ridge as soon as humanly possible to be followed by the refinancing immediately thereafter.

That's very helpful. I appreciate it. And congrats on the all the progress making on all the different assets, and I'll jump back in the queue.

Brian McKenna, Citizens JMP.

Thanks. Good morning, everyone.

So I had a few questions on Transtar. First, do you have any updates on the US deal transactions from your end? And just any updated thoughts on the potential implications here?

Hey, Brian. Good morning.

The -- like I'll start by just saying it's obviously uncertain as to whether Nippon gets the final approval. And I'm going to get to our view on that in just a second.

That said, I can't tell you it won't have a material impact on Transtar one way or the other. I would say it's slightly better for us if Nippon is approved because they intend to invest significantly in the Pittsburgh Mont Valley complex and so that's obviously a good thing for Transtar.

But at the end of the day, that transaction itself, we don't expect to be terribly material or have much meaningful downside to Transtar in the event Nippon is not approved. I am optimistic about Nippon being approved for -- to close on the acquisition.

I'm not sure if you saw but just a few weeks ago, the labor unions that had been more difficult supported -- came around and finally supported the transaction and recommended that the government approved the Nippon transactions. So they're -- that was a fair number of headlines around negotiations with the with the unions and it sounds like support the unions is now in hand. So that's a big development.

My understanding is at this stage, its approval is slotted for some time in December, and that's what we're expecting. The decision is slotted in December and if I had to guess, as I said, we're optimistic about it. In the event Nippon were not approved, we don't think it has a material impact on business at Transtar.

Yeah, okay. Got it. That's helpful.

And then just to follow up on Transtar as well, it's clearly been talking about the potential for M&A in and around Transtar. So where do things stand on this front and what's your expectation around the timing of any transactions? Is there a way to think about the potential accretion from a transaction and then ultimately, how additive could some of this M&A be relative to the 50% annual organic growth target you've laid out?

It could be meaningful. We are always looking at transactions. I would tell you there is a -- we've seen a bit of an increase in market activity. We're currently looking at three opportunities, two of them on the slightly smaller side, somewhere between $5 million and $15 million of annual EBITDA, and one is larger.

I guess I would describe where in the middle innings, if you will, of those processes. And a couple of them are negotiated transactions. One's a more competitive transaction.

Look, it will be meaningful. That is part of the thesis at Transtar. It is an amazing platform for future acquisitions and it's part of the business plan. And these are businesses freight rail portfolios trade at 15 times event. It's a pretty well established multiple in the M&A market,

And I think as Transtar diversifies its revenue base through external investments and acquisitions; we will migrate to that multiple in the mid-double digits. And if you just do the math, acquire $50 million of EBITDA take combined EBITDA to $150 million, put a 15 multiple on that with no leverage that is significant in terms of value creation.

This is a business we've owned now for three years. It has consistently over the past three years grown at 15% plus annual EBITDA caters. And I think that organic growth is certainly still going to be there for several years to come, but M&A is a game changer at Transtar in terms of the value proposition, so we are extremely focused on it.

Alright, that's great. Appreciate it. I'll leave it there.

Sherif Elmaghrabi, BTIG.

Hey, good morning. Thanks for taking my question.

First with Jefferson, the $20 million of EBITDA for new contracts next year, did you unpack what contracts are included in that and what investment remains to get them across the line?

Yeah, good morning, Sherif. Happy to do that.

Two contracts. The first is a contract for handling crude oil. It's a 5-year contract with one of our two major refineries. And that commences on April 1 of next year, generates about $8 million of annual leave, so that's 8 of the 20.

The second contract is with a global major ammonia producer, and it's an ammonia export -- ammonia transloading contract that's a 15-year deal. It commences July 1. And represents a minimum of $12 million of EBITDA annually with some escalators over the 15-year contract term. It's a great, greatcontract.

Both projects are fully funded. We raised the money in the tax-exempt markets in the second quarter, and they are on time on budget. I don't see any risk of delay at this stage. We're pretty well advanced with both projects and so it's just a matter of completing the construction and then bringing the contracts online.

That's helpful.

And then on Longridge, what's GE's role in the operating, if any, on their call they mentioned growing service backlog? And I'm wondering if there's a lead time associated with getting that into the queue, especially given could see a data center contract in the first half next year?

Yeah, they -- GE, it is, of course, determined we bought from GE. There is no mechanical change that needs to happen to the turbine. The turbine is capable of generating 505 megawatts as is today.

There is software that regulates power generation today at 485 megawatts. There's no additional component or part that we require. It is literally just a software change.

We could do it in a day. We just need regulatory approval to increase the generation by 20 megawatts. There is no incremental cost and nothing other than the reprogramming of software to allow the turbine to generate the 505 megawatts. So outside of it being GE's technology, we don't rely on anything from GE to act the upgrade.

Got it. Thanks for taking my question.

Ladies and gentlemen, I am showing no further questions in the queue. I would now like to turn the call back over to Alan.

Thank you, [Twanda], and thank you all for participating in today's conference call. We look forward to updating you after Q4.

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