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spk01: Good morning and thank you for standing by. Welcome to the second quarter 2023 FTAI Infrastructure Earnings Conference call. At this time, all participants are in the listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Alan Andrini, Head of Investor Relations. Please go ahead.
spk02: Thank you, Michelle. I would like to welcome you all to the FTI Infrastructure Second 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 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 gap 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, Alan, and good morning, everyone. This morning, we'll be discussing our second quarter financial results and also providing an update on the latest developments in each of our business segments. For this call, I'll be referring to the second quarter supplemental materials recently posted to our website. Before we get to the financials, I'm pleased to report that we will be paying our fourth dividend as a standalone company with our board authorizing a $0.03 per share quarterly dividend to be paid on August 15th to the holders of record on August 8th. Now on to the financial results. Adjusted EBITDA for the second quarter came in at $36.2 million prior to corporate expenses, up 20% sequentially from $30.1 million in the first quarter of 2023 and representing a record result for our company. Three of our four business segments posted growth quarter over quarter, while a long-ridge power and gas business continued to generate double-digit EBITDA just slightly softer than Q1 as lower gas prices meant we slowed down sales of gas into the third-party market. More importantly, during the quarter, we made good progress on a number of new initiatives and growth projects, so we expect to continue to experience growth in the second half of 2023 and the years ahead. Based on these initiatives, we continue to target reaching a run rate of $200 million of annual adjusted EBITDA from our segments by the end of 2023, with no additional capital required to meet that target. In terms of the highlights at each segment, Transfer had a great quarter, with adjusted EBITDA coming in at $20.3 million, up 18% from Q1 of this year. At Jefferson, while adjusted EBITDA for the quarter was also a new record, we're even more excited about a number of new business wins we secured during Q2 and are confident we will begin to post double-digit EBITDA in Q3 and beyond. At Rapano, while the financial results reflect an adjusted EBITDA loss, this loss was largely a result of the startup of operations under our new multi-year tolling contract experienced in the early parts of the quarter, and we're entering Q3 now generating positive adjusted EBITDA. And finally, at Longridge, normal operations continued, and we reported $10.4 million of adjusted EBITDA. All in, a very strong quarter setting the stage for continued growth. Briefly on the balance sheet, we ended the quarter with $42.5 million of cash. In the aggregate, we had $1.3 billion of debt shown on the balance sheet of June 30. Shortly after the quarter end, in July, we issued $100 million of additional debt through an add-on to our existing senior secured notes. Proceeds from the issuance were used to repay approximately $75 million of existing debt, including our $50 million revolver at Transtar. So pro forma for the issuance, total debt on our balance sheet increased only slightly by $25 million from the June 30 balances that are reflected in the earnings supplement and in our 10Q. Importantly, Transtar is now 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 and then plan to turn it over for questions. I'll start with Transtar on slide 7 of the supplement. Transtar posted revenue of $42.5 million and adjusted EBITDA of $20.3 million in Q2, up from revenue of $41 million and adjusted EBITDA of $17.2 million in Q1. Both carload volumes and average rate per carload were higher for the quarter as U.S. steel production at the Gary, Indiana, and Pittsburgh, Pennsylvania facilities continued at normal levels. Away from U.S. steel, we also continue to make very good progress on multiple initiatives at Transtar to drive incremental third-party revenue in EBITDA. We expect these programs to represent approximately $30 million of incremental EBITDA opportunities annually with no additional investment. Now on to Jefferson. Jefferson generated $17.1 million of revenue and $7.1 million of adjusted EBITDA on Q2, compared to $19.1 million of revenue and $6.5 million of EBITDA on Q1. I'll take a minute to discuss the makeup of the P&L for the quarter, which showed a shift to increased volumes of refined products versus crude oil. Translating rates for refined products are typically lower on a per-barrel basis for Jefferson, given that the process involves no heating or blending as crude often does. But the fine products can also generate a higher margin since the operating costs associated with the fine products are quite low. For Q2, you'll see we posted lower revenue due to this dynamic, but continued the pace of EBITDA due to lower operating expenses. More importantly, at the end of the second quarter, we completed commissioning and started operations at our new ship dock, which doubles Jefferson's ship handling capacity and represents the final component of Jefferson's full build-out at the main terminal. The new ship dock clears the path for refinery customers to now fully utilize Jefferson's storage and transloading capabilities, and we expect substantial increases in volumes entering the second half of the year. On the new business front, we recently secured two new contracts at Jefferson. The first, which is at the main terminal, involves the handling and storage of NAPFA for a large trading firm. That commences immediately and should more than offset the reduced crude oil volumes we saw during Q2. The second contract, which is materially more meaningful, is at our newly acquired Jefferson South site, where we secured a new 15-year contract for the transloading and export of hydrogen-based clean fuels commencing in 2025. Together, these two contracts are expected to generate in excess of $10 million of annual EBITDA and potentially materially more. We expect to enter into additional contracts for the handling of clean fuels in the coming months as new developments in the Beaumont market have been accelerating, generating new demand in an environment where supply of available logistics terminals is very scarce. Moving to Rapano, we commenced our multi-year contract to transload natural gas liquids using our phase one system in Q2. The contract is one of the world's leading trading companies, has minimum volume commitments, and does not expose Rapano to commodity prices. We did experience some initial startup costs that resulted in small adjusted EBITDA loss in Q2, but as I mentioned, those should be behind us, and we're generating positive EBITDA going forward. With phase one having commenced, Rapano is now focused on securing business for our larger phase two transloating system. As detailed on slide nine of the supplement, our phase two system is expected to materially increase our storage and 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. 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. Finally, moving on to Longridge. Longridge generated $10.4 million in EBITDA in Q2 versus $11.3 million in Q1. Power plant operations were steady while gas production was managed down during the quarter in the currently lower gas pricing environment. At gas prices of under $1.50 per MMBTU, our profit on third-party sales is less impactful. So we have deliberately limited production to volumes needed solely to fuel the power plant and opted to keep excess gas in the ground in anticipation of higher gas prices, which are typical as we enter the fall and early winter. At Longridge, we continue to progress a number of initiatives. In the near term, we're expecting final approvals in the coming months for the uprate of the power plant to 505 megawatts, an increase of 20 megawatts from our current generation capacity. That will contribute incrementally, but down the range of 5 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. To wrap up, we're pleased with our first half of 2023 and excited about the things to come in the next half of the year. With that, let me turn the call back to Alan. Thank you, Ken. Michelle, you may now open the call to Q&A.
spk01: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while I compile the Q&A roster. Our first question comes from Juliana Bellona with Compass Point. Your line is open.
spk03: Good morning. Thanks for taking my questions. Starting off, I think here's from a high level, you know, sequentially, you know, on a quarter basis, contology of EBITDA was up 26%. I'm curious if you're expecting similar increases in 3, 3, and 4, 2, or throughout the balance of 23%.
spk02: Yes, we are. As our businesses continue to ramp up, we are expecting to maintain 20% EBITDA growth from the segments and closer to 25% after corporate expense. I think the only potential blip in that is from time to time we have scheduled maintenance at the Longridge Power Plant. That may affect a month's worth of cash flow out of Longridge in any particular quarter, depending upon when that month falls. I do think we have a scheduled maintenance event coming up later this year, whether that falls in the month of September or the month of October will ultimately drive, you know, what Longridge ends up doing in that particular quarter. But outside of that, yes, that's the pace of growth we're anticipating to continue.
spk03: That's great. And I was going on an asset basis. Starting off with Tramstar. I'm curious if there's any third-party contribution in the $20.3 million that you reported in the second quarter.
spk02: Yeah, I'd say about directionally about 10% of that EBITDA is attributable to third parties. Obviously, our goal is to continue to integrate that and diversify the revenue stream. I think we've got a lot of things going on that are going to enable us to do that as we've been entering the second half of the year and turn into next year. I'm excited about it. I think there are a number of different initiatives that will drive EBITDA growth and also diversify the EBITDA.
spk03: That sounds good. And then next time, you know, he goes a little bit more detail around the 30 million of incremental EBITDA at trends or in the timing around when I could start to flow through or part of it starting to flow through, but you know, the balance of the 30 million.
spk02: Yeah. Yeah. The, um, the vast majority is, you know, uh, trivial third party business. We have a number of, um, uh, new developments coming online. in the coming months, a very large rail car repair and maintenance facility in Pittsburgh, which is progressing really nicely. I was in Pittsburgh just about a month ago and saw the progress. That's going to be a big deal for the Union Railroad, TransArts Union Railroad in Pittsburgh. We have a new transload facility. We're tripling the size of the transload facility in the Detroit area, and that's coming along great. I would say of the $30 million... It's safe to say 15 to 20 million is in a very, very good place. I wouldn't say it's entirely 100% in the bag, but it's coming along very well. I'm highly confident in 15 to 20 million of the 30. I think the remaining 10 million or so is for us and the TransStar management team to go get. But I think that's very achievable given the assets that we have and all the activity around us. So I feel very good about where TransStar is today. We had a very good second quarter. I think we'll continue to have strong third and fourth quarters and slowly chip away at that $30 million in the couple quarters ahead. That's great.
spk03: And then for a slightly different angle, I'm curious what you think the ultimate potential is for Transar over time.
spk02: Well, I mean, the potential could be significant with acquisitions and additional investment. Without additional investment, given the capacity and the leverageability of the existing rail systems, I'd say it's plus or minus 150 million EBITDA. I think the potential for the assets in place over the next couple of years, two to three years, with no material incremental investment, it probably reaches you know, about $150 million of EBITDA. That's our longer-term, you know, project for the collection of railroads at Franstar. Obviously, you know, the goal is to exceed that with, you know, new investments, and, you know, we're always looking at new opportunities. But I think over the next two to three years, you know, our longer-term plan is to hit a $150 million number, plus or minus.
spk03: That's great. Thank you. And then shifting over to Jefferson. Where do you see the near-term growth in EBITDA coming from that will get you to that 10 million plus or 10 million or greater quarterly EBITDA run rate starting in the third quarter?
spk02: Yeah, I really think we're largely there as we're now almost one month into the third quarter in terms of the double-digit EBITDA. I think the biggest development, obviously, we have a couple of new contracts that are super. One is commencing immediately, and so that's going to have an immediate impact. But really, from an infrastructure standpoint, it was the completion of the second ship dock. Remember, at Jefferson, we now have three docks. And dock space for energy terminals is like the front door to the house. And you can only manage so much volume if you have constraints at your docks. We completed dock two. We had been operating with dock one and dock three. We completed doc two at the end of June. And so that was the bottleneck to the entire 6 million barrel, you know, uh, logistical system. And now that that is operating, I think that's, that's going to be a big, uh, a big, uh, sort of a contributor to additional volume and additional, uh, EBITDA growth. I think it's going to come from refined products, uh, primarily. I think crude oil is continuing to come out of the Uinta Basin and we'll continue to see a steady flow of Uinta Basin crudes. Canadian crudes tend to be more volatile. I think the real growth over the next three to six months for Jefferson as we start to post double-digit EBITDA will really be through the refined products, which again will be lower revenue as we saw in the second quarter, but higher EBITDA.
spk03: That sounds good. Then related to the new 15-year contract, the Jefferson South project, can you tell me a little more about the CapEx for that project and also kind of the contribution around that?
spk02: Yeah, I mean, we're particularly excited about that contract. That is really the first major hydrogen-based fuel transloading contract that I'm aware of in the entire Beaumont-Port Arthur market, and we secured the business. It is at our Jefferson South Terminal, which is a different piece of land located across the river. That was, if you recall, a terminal we purchased last year, and we have been developing. I think there's a lot to do. I very much believe that this first contract is the first of many that will be particularly focused on clean fuels. When we purchased that site, it had an existing dock. In order to handle this contract, that doc needs to be refurbished. We estimate that will be between $30 and $40 million of expenditure that will be required to refurbish the doc in order to start the business. So it's not terribly significant, and the economic returns are very compelling, particularly given it's a 15-year contract. By the way, that contract is not just long-term, but it also contains minimum volume commitments from the counterparty. And so 15 years, minimum volumes, locking in, you know, what will ultimately become double-digit EBITDA on a $30 to $40 million investment is something we really like.
spk03: That's great. Then shifting over to Rupano, how close are you to getting approval on the caverns? And also, you know, how close are you to securing new contracts to reach FID for phase two? It is...
spk02: Those two projects that you just mentioned are now really our sole priority at Rapano. I think we're about, at some point over the next three months, I think we'll have the permits in hand for the caverns, and I think we'll have contracts in place for phase two. We're very close. It's very active engagement with the permitting agencies and counterparties. Would have liked to have had it all done by now, but we don't control the timing of these things. And so very, very close. Our goal is to have this stuff all done in the next three months.
spk03: Sounds good. And then thinking about the power plant at Longridge, obviously gas cells are the primary source of volatility there in the quarter. And I'd be curious at what price would you need to see natural gas before turning on gas cells again?
spk02: Yeah, I mean, our underlying prices today are anywhere from $1.30 to $1.50 in MMBTU. Those are market prices in our region. We produce gas ourselves at slightly less than that. So theoretically, it would be profitable to produce excess gas and sell into the third-party market. It just wouldn't be much in the way of profits. And we sort of, you know, have made the decision that in this environment, you know, we will produce less and bank the gas in the ground, knowing that, you know, it is highly likely in the late fall and early winter that gas prices will go up. Of course, no one really knows precisely what will happen to gas prices, but I would tell you, you know, generally we would target roughly $2 an MMBTU, maybe a little bit less, you know, prices creep up to $1.80, $1.92, I think we'd start turning back on gas production. And north of $2 for sure, we would start producing excess gas again and selling into the market.
spk03: Okay. Then thinking about more of a general question, I'd be curious if you can build the $50 million quarter or $200 million run rate quarter by components. to provide a sense of where the growth contribution needs to come from to get to that 200 million run rate that you're targeting by the end of 23?
spk02: Sure, yeah. Maybe we'll just go through it for each of the four segments and then deduct some corporate expense and add it up that way. I mean, Transtar, I really think, in the next two quarters should be running at 25 million of EBITDA. Certainly as we swing into next year out of 23 and into 24, we should be pushing up against 25 million of EBITDA. So that's the number of Transtar. Jefferson high teams, call it 17, 18 million at Jefferson at the end of Q4. feel pretty comfortable with that target. Rapano will continue to be small until Phase 2 kicks in. Rapano will be $2 million to $3 million of EBITDA, and then Longridge should continue to be steady and producing EBITDA of about $12 million for us. So add all that up, deduct what will probably then, at the end of the year, be closer to $7 million of corporate expense, maybe $8 million, but add up the I think I said 25, you know, 18, three-ish, 12, and deduct eight, and you should get pretty close to the 50.
spk03: That's great. Thanks. One last one. I'm curious what the current M&A environment looks like for you guys.
spk02: Yeah, we... It's a great question. We're definitely seeing increased activity. Obviously, we're going to continue to be very disciplined, but I do feel like with the momentum at Transtar and our terminals businesses really maturing, and the teams of professionals we put in place both at the railroad and at the terminals business, we are a very capable buyer of additional businesses and assets in those two spaces. You know, yeah, we're reviewing a lot. I would say, you know, it's been now 12 months that FIPP has been an independent public company, and we are definitely as busy as we have been in that 12-month period looking at investment opportunities. So, you know, I'm hopeful we'll see something in the next few quarters based on all this activity, but you never know. And as I said, we'll continue to be very disciplined. But I definitely think the M&A market, which was admittedly quite slow late last year and into early this year, has been coming back and we're seeing more and more opportunities for sure.
spk03: That's great. I really appreciate the time and answering all my questions. I'll jump back on the queue. Thank you.
spk01: I show no further questions at this time. I would now like to turn the call back to Alan for closing remarks.
spk02: Thank you, Michelle, and thank you all for participating in today's call. We look forward to updating you after Q3.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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