Q3 2023 FTAI Infrastructure Inc Earnings Call

Good day and welcome to the Q3 2023 F T I infrastructure earnings Conference call. As a reminder, this call's being recorded I'll now turn the call over to Alan and Dreamy Investor Relations you may begin.

Thank you Michelle I would like to welcome you all to the upcoming infrastructure third quarter 2023 earnings call. Joining me here today are Ken Nicholson.

Infrastructure, it's Scott Christopher <unk>, 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.

I'll 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.

Which 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 SEC and now I would like to turn the call.

All over to Ken.

Thank you very much Alan and good morning, everyone. This morning, we'll be discussing our third quarter financial results and also providing an update on the latest developments at each of our business segments for this call I'll be referring to the third quarter supplement supplemental materials recently posted to our website.

Particularly kick things off I am pleased to report that our board has authorized a three <unk> per share quarterly dividend to be paid on November 16th to the holders of record on November nine.

Under the financial results adjusted EBITDA prior to corporate expenses came in at $32 2 million for the quarter and $98 8 million for the nine months year to date, our year to date results were up 25% versus last year with each of our four segments demonstrating growth reflecting on the results while the headline third quarter numbers may not showing I believe this was our most productive cough.

Since the spinoff of our business in August of last year, and our accomplishments during the quarter as it relates to new executed contracts set the stage for a strong fourth quarter in 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.

To our revenue and earnings here in <unk>.

Looking forward, we are targeting adjusted EBITDA to grow meaningfully in the coming quarters based on these events in the near term, we expect adjusted EBITDA to be up 10% to 20% sequentially in the fourth quarter and we continue to target, reaching a run rate of $200 million 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 Transtar reported $17 4 million of adjusted EBITDA down a bit from an extremely strong two Q and up from Q1 of this year operationally transfer 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 under <unk>.

Months.

Order would have been more in line with <unk> results.

At Jefferson EBITDA grew with the ramp up of our business continues more importantly during the quarter, we executed a number of new contracts representing in excess of $20 million of incremental adjusted annual annual EBITDA. A portion of these contracts commenced this month and will contribute to our results in Q4 and going forward.

<unk> adjusted EBITDA loss continued to narrow while we made significant progress on our phase two expansion project that will transform our business and long term EBITDA generation and finally at long Ridge normal operations continued.

Reported $8 million 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 had $1 3 billion of debt at September 30, and no near term maturities approximately $750 million of that was that our Jefferson segment and 25, what's happened upon them.

Both of these entities that 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 step is an asset. In addition, our transtar freight rail business is completely debt free meeting all cash generated at the business can be distributed up to fifth with no limits of 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.

I'll start with Transtar on slide seven of the supplement Transtar posted revenue of $41 9 million and adjusted EBITDA of $17 4 million in Q3 down from revenue of $42 5 million and adjusted EBITDA of $20 3 million in Q2.

Carload volumes grew for the quarter, while average rate per carload declined as the mix of freight was impacted somewhat with higher margin projects related to the auto sector being soft during 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 we're unique.

The largest variance was in fuel expense, which was higher given the overall higher price of diesel during the quarter, while we pass through this cost to our customers. We received reimbursement in 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 that trend start to drive incremental third party revenue and EBITDA. The bar chart on the right of slide seven of the supplement shows the incremental EBITDA. We expect from each initiative in total we expect these programs to represent approximately $7 5 million of quarterly adjusted EBITDA or 39%.

In annual basis commencing in 2024.

Now on to Jefferson Jefferson generated $16 6 million of revenue and $7 8 million of adjusted EBITDA in Q3, compared to $17 $1 million of revenue and $7 1 million of EBITDA in Q2.

The P&L at Jefferson continued to demonstrate a shift to increased volumes of refined products versus crude oil trans loading rates for refined products are typically lower on a per barrel basis for Jefferson given the process involves no heating your blending its crude often does for refined products also generate a high margin since the operating costs associated with refined products are quite low.

Q3, you will see we posted lower revenue due to this dynamic to continue to grow EBITDA due to the lower operating expenses.

But the more important development during Q3 was on the new business front, we secured three new contracts at Jefferson, which in total represent $20 million of long term annual adjusted EBITDA for the third quarter did not contain any EBITDA from these new contracts three of the two contracts have already commenced at this stage in Q4. So we will see the positive benefit in our Q4 results.

Ahead of <unk>.

Third contract is at our newly acquired Jefferson South site, where we secured a new 15 year contract for the trans loading and export of hydrogen based clean fuels commencing in 2025.

Another highlight of Jefferson as the recent return of Canadian crude volumes after almost two years of absence.

Canadian crude handling is a very high margin business for us in this quarter would be handling multiple unit trains of Canadian crude oil that we hope represent more 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, we're seeing something we haven't we've been waiting to see for quite a while now with a terminal competition for our capacity.

However, upon and we continue to narrow our operating loss our phase one multi year 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 PON or the commodity prices with this phase one having commenced upon us finalizing contracts, where it's much larger phase III trans loading system.

As detailed on slide nine of the supplement our phase II system is expected to materially increase our storage throughput capacity when it comes online in two years in the aggregate, we expect phase two to cost approximately 200 million to build and to generate in excess of $40 million of annual EBITDA once complete.

Moving onto long ridge, Longbridge generated $8 million in EBITDA in Q3 versus $10 4 million in Q2 power plant operations were steady while gas production continued to be managed down during the quarter and the currently lower gas pricing environment.

Gas prices are under $1 25 primary Btu, our profit on third party sales is less impactful. So we've deliberately limited production and opted to keep excess gas in the ground in anticipation of higher gas prices, which are typical as we enter the winter season.

We're taking a planned maintenance outage here in the fourth quarter. So our results will see some impact from that outage, but we expect the outage to be routine with the next outage scheduled for late spring.

At long Ridge, we are focused on wrapping up financing for our recently acquired gas resources in West Virginia, We expect to have final debt commitments in place in 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 are expecting final approvals in the coming months for the up rate of the power.

Plant the 505 megawatts, an increase of 20 megawatts from our current generation capacity that will contribute incremental EBITDA in the range of $5 million to $10 million annually based upon current forward curves for the price of power.

Over the longer term, we are seeing increased interest from behind the meter customers, including data center developers and companies focused on energy transition opportunities.

Wrap up we're pleased with our direction as we enter the final quarter of 2023 and excited about the things to come in next year ahead.

Let me turn the call back to al.

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

Thank you if you'd like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself Mchugh. Please press star one again.

Our first question comes from Giuliano Bologna with <unk>. Your line is open.

Good morning, Congratulations on all the progress contracting.

Assets this quarter.

One thing I'll be here.

Kick it off here with all the new contracts at Jefferson can you predict.

EBITDA will will shake out in <unk> of this year.

Hey, good morning, Joanna yes.

Yes.

We feel very comfortable that Jefferson is going to be in the double digits in the fourth quarter.

Probably in the range of 10 to 12.

In <unk> and then I think it grows from there commencing in Q1.

As I mentioned in my in my remarks, two of those three contracts have already kicked in.

Present about half of the $20 million.

I described three contracts to represent about 10 or $11 million of EBITDA in the third represents about 9 million of EBITDA. So those two factors.

Any annual EBITDA 10 to 11 have already commenced and so that will contribute into the fourth quarter EBITDA here.

Very helpful. Then switching on the transfer.

Alright, I'm curious.

What do you think.

The auto strike impact will be unfortunately, yes, sir.

Well it's tough.

We're encouraged we set forward.

Reached tentative deal with the UAW.

Jim its still anthos.

Hopefully close behind I'll tell you look the auto strike had an impact in Q3 I would expect at this point the impact would be somewhat similar to Q4.

We don't have a 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 remember at transtar.

If it's a fuel impact and a handful of other things that.

Q3, a little bit softer, we expect 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 million.

Very helpful.

And then.

On a similar topic when do you expect.

The contract rate increases kicking that transfer.

Yes, we take annual rate increases and it's subject to an inflation based metric they do range, depending upon the individual's freight moves a range from as low as a 5% annual rate increase to as high as a 12% annual rate increase those will all commence January one.

So we will see the impact immediately in Q1, it's pretty significant.

The rate increase alone is up to $5 million of incremental EBITDA.

That's the beauty of railroads pricing power is.

It was a beautiful thing in every every penny of price go straight to the bottom line, we have been seeing some of that inflation in our costs, leading up to this but we get the rate increase in Q1 and so that.

That'll be that'll be a nice refreshing moment to start seeing higher rates as we enter 2024.

Very helpful and then.

The more general question, but assuming trend circle normalizes, everyone. Here 24, assuming the two Jackson contracts are fully ramped up.

Arctic NIM during the fourth quarter.

When do you expect to be at that $200 million EBITDA run rate.

Our goal is to be there in Q1 $50 million EBITDA in Q1 from four segments.

I think thats if were 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 the Jefferson, we've got a pretty clear line of sight.

Ill note with Jefferson, it's not just three contracts, we signed here in Q3.

We are working on a significant contract at Jefferson that we're very hopeful we'll have executed here in Q4 that would 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.

Goal is to hit.

$50 million quarterly EBITDA of 200 million run rate at some point in Q1, if we if we.

We arent able to get there I know, we'll be very close and we're headed in Q2.

Very helpful and then.

Can you talk more about the EU under this <unk>.

All the currently announced production, but is there any opportunity there.

Sure.

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 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 150000 barrels per day of crude oil. The first 85000 barrels state local and feed the local refineries and anything in excess of that 85000 is quote unquote export it out of the state and all of that crude oil goes to the Gulf. So today, you've got 65.

5000 barrels going to the Gulf production is increasing from 150000 barrels per day to 300000 barrels per day over the next six to 12 months. So you get a sense for the scale and all of that incremental 150000 barrels are going to be exported to the Gulf.

The that's the equivalent of three trains per day at Jefferson, we have the capacity to bring in roughly a train a day, maybe a little bit more of waxy crudes at 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 our refinery.

It's a rapidly developing market theres been a lot of capital committed to more production and the expansion of the two major terminals out in the basin.

And so we expect to see more product flowing out of the basin as early as here in the fourth quarter.

Certainly into next year, and we're very hopeful that a big chunk of that volume comes to Jefferson.

Very helpful.

I'm sitting here at Apollo.

I'm curious if you'll be able to announce.

Through the third party entity.

Maybe signed a contract with.

Well I think what will 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 get your press release to make sure people are aware thats been signed.

It's a very big development for upon us. So that's certainly something we will communicate once executed whether you can share the name of the counterparty.

Obviously, we need to get their permission to do so I can tell you it is a.

Very well known.

Large integrated.

Energy company, an investment grade.

Obviously, if we can show their name we definitely will.

That's great and then Im curious if theres still looking at tuck in acquisitions on.

On the rail side, where trends are in Dhahran Jefferson.

We always are we're certainly always looking.

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 the freight rail space that I think it is exciting to 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 are highly complementary to what we do at Jefferson and so.

Hopefully hopefully those things.

Come together.

But we'll always be looking and.

And youre, 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.

That's very helpful. I really appreciate the time.

Let me ask a quick question and I will jump back in the queue. Thank you.

Thanks.

Thank you that concludes the question and answer session I'll turn the call back over to Allen for any closing remark.

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

We look forward to updating you after Q4.

Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.

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