FTAI Infrastructure Inc.

Good day and thank you for standing by. Welcome to the second quarter 2024 FTAI Infrastructure Earnings Conference call. At this time, all participants are in a 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 1-1 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 speakers today. Alan Andrini, Investor Relations. Please go ahead.

Thank you, Victor. I would like to welcome you all to the FTI Infrastructure second quarter 2024 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 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 the 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.

Okay. Thank you, Alan, and good morning, everyone. This morning, we will be discussing our financial results for the second quarter of 2024. In doing so, I'll be referring to the earnings supplement, which we recently posted to 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 August 20th to the holders of record on August 12th. Now, on to the results. We continued strong momentum in 2Q, recording adjusted EBITDA prior to corporate expenses of $41.8 million. up 15% from the second quarter of 2023, and up 12% sequentially from the first quarter of 2024. Each of our businesses performed in line with or slightly ahead of our expectations for the quarter. Looking forward, we expect the second half of 2024 to demonstrate continued momentum across all four companies as a result of new business wins and initiatives we have underway to capitalize on a series of macro trends. Our thesis has always been to own and control core infrastructure in major markets with strong competitive positions, long-term contracted cash flow, and a broad spectrum of opportunities to act upon to drive incremental growth. Whether it is new energy flows through our Jefferson and Rapano assets, data centers, and surging demand for power at Longridge, or a growing list of strategic opportunities at Transtar, we believe our portfolio of companies today is at the center of the largest set of opportunities since the inception of our company. We continue to forecast generating an excess of $200 million of run rate annual EBITDA by the end of 2024 and expect to meaningfully exceed that result in 2025. In terms of the highlights of each segment, Transstar delivered another strong quarter, posting $22.1 million of adjusted EBITDA. Car loads for the quarter held steady while average rates came in at another new record. The second quarter represented the first full quarter of operations at a rail car repair facility on the Union Railroad in Pittsburgh. We expect this facility, as well as a handful of others in development, to represent meaningful EBITDA growth for the car repair business. Also, we continue to grow our third-party customer base at Transtar, adding a number of new customers in Q2. At Jefferson, EBITDA was $12.3 million for the quarter as we handled record volumes, averaging 215,000 barrels per day of crude oil and refined products. During the quarter, we completed a new financing at Jefferson, accomplishing a number of objectives, including refinancing near-term maturities, funding construction projects, and funding a tender offer at a discount for some of Jefferson's existing tax-exempt bonds. At Rapano, we are preparing to start construction on our Phase II cryogenic tank in this third quarter. We're in the process of arranging all financing, and the commercial landscape is extremely favorable, positioning us to have multiple contracts in place when we close the financing. And finally, at Longridge, results for 2Q include a scheduled maintenance outage in May and limited third-party gas sales, but do not reflect the tremendous upside inherent in the asset. This week, the results of the recent capacity auction were made public, coming in at a level 10 times higher than current capacity pricing and reflecting the surge in demand for power driven by AI-focused data centers. I'll talk in more detail in a bit, but the capacity auction results alone represent approximately $32 million in of incremental EBITDA for Longridge, or approximately $16 million for our 50% share of the asset for the 2025 to 2026 capacity season. Briefly onto the balance sheet, we had total debt of $1.6 billion at June 30th. $564 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 $948 million of debt was at Jefferson and $50 million was at Rapano. The Jefferson financing that we completed in Q2 enabled us to accomplish three things. First, we refinanced a small portion of existing debt coming due next year. Second, we funded construction activity in connection with two recently signed contracts. And third, we funded the tender offer, capturing some of the trading discount in Jefferson's outstanding tax exempt bonds, which carry lower coupons. We expect to opportunistically pursue more tender offers in the coming quarters to capture additional discount and increase our equity value in Jefferson. I'll talk through the detailed results at each of our segments and then plan to turn it over to questions. Starting with Transtar on slide 7 of the supplement, Transtar posted revenue of $45.6 million and adjusted EBITDA of $22.1 million in Q2, compared with revenue of $46.3 million and adjusted EBITDA of $21.7 million in Q1. Carload volumes held steady while average rates registered a new record of $667 per carload. We expect the overall environment for carlets to remain strong during the second half of this year with U.S. steel production levels steady and third-party customer activity growing. Operating expenses were stable as fuel costs and other material cost items were largely unchanged for the quarter. At Transtar, we're making good progress on our various initiatives to drive incremental revenue and diversify our customer base. 2Q was our first full quarter of operations at our new rail car repair facility on our Union Railroad. During the quarter, we handled a total of 816 rail cars. Given the demand outlook, we're preparing to introduce a second shift at the facility, which will provide capacity now to handle up to 1,800 cars per quarter. During the quarter, we continue to add new third-party customers and expect to add a half a dozen more in the second half of this year, further diversifying our revenue base. And finally, on June 1st, we commenced a lease with Norfolk Southern for a 41-mile extension of Transtar's current East Ohio Valley Railroad. The extension provides Transtar with additional commercial opportunities, which have the potential to contribute meaningfully to EBITDA in the near to mid-term. With a good path for organic growth in front of us, we're increasing our focus on the strategic front, staffing up our corporate development team and engaging with multiple parties. Transstar is an excellent platform for acquisitions of other short-line and regional rail assets, and we hope to act on one or more opportunities in the coming quarters. Now on to Jefferson. Jefferson generated $21.2 million of revenue and $12.3 million of adjusted EBITDA on Q2 versus $18.6 million of revenue and $6.8 million of EBITDA on Q1. Both throughput volume and revenues came in at new records. Approximately two-thirds of our volume for the quarter was in refined products, with the other one-third in crude oil. We generate higher rates for handling crude, so the revenue mix was approximately 50-50. We continue to see a pickup in volumes of waxy crudes from Utah and are bullish about the future. In 2Q, Jefferson became the first terminal in the United States to load waxy crudes for exports. Following that successful initial shiploading, the customer requested three additional cargoes that occurred during the quarter. With our unique handling capabilities, Jefferson opens a major gateway for waxy crude exports, and we're working with producers in the Uinta Basin to create long-term, consistent flows through Jefferson to international markets. The new business environment at Jefferson remains extremely attractive, and we're advancing more opportunities for both conventional energy products as well as clean fuels. Two recently executed long-term contracts will commence in 2025, representing $20 million of annual EBITDA. One contract relates to the export of clean ammonia at our Jefferson South terminal, and the other relates to crude oil flows through our Southern Star pipeline. More importantly, we are now currently negotiating additional contracts representing approximately $60 million of annual revenue that will be transformational for Jefferson. As we said last quarter, if we're successful in converting these opportunities to business wins, we will far exceed our prior targets of $80 million of annual EBITDA. Now on to Rapano. As Phase I operations continue, we're preparing to start construction of our much larger Phase II transloading system. As a result of increased demand that we are seeing, we have expanded the scope of Phase II to accommodate higher volumes and now expect the Phase II system will provide capacity for transloading up to 75,000 barrels per day of natural gas liquids, including propane, butane, and other products. Total construction costs are expected at $250 to $275 million, which will be funded entirely with tax exempt debt. Assuming full utilization and rates that we are negotiating with counterparties, Phase 2 can contribute approximately $75 million of annual EBITDA once complete, meaningfully more than our initial expectation of $40 million based on contracts currently being finalized. In closing out with Longridge, Longridge generated $8.8 million in EBITDA in Q2 versus $10.4 million in Q1. Our power plant capacity factor was 69% for the quarter as the plant went through scheduled maintenance for the bulk of the month of May. Were it not for the maintenance outage, EBITDA at Longridge would have exceeded Q1. Gas production continued to be managed down during the quarter in the currently lower gas price environment. More importantly, we have been experiencing a number of developments that have the potential to significantly increase EBITDA and cash flow at Longridge. This week, capacity auction results were reported with capacity pricing for the mid-2025 to mid-2026 period announced at a nearly 1,000% increase versus current pricing. To put that in perspective, today Longridge generates capacity revenue of just under $5 million annually. Under the new pricing environment, our annual capacity revenue at Longridge will be $37 million annually. for the 2025 to 26 season, with the incremental $32 million dropping entirely to the bottom line. The increase in pricing is a result of several factors, including the anticipated surge in demand for power in our region as a result of AI data centers and retirements of coal-fired power plants. While we're benefiting from the higher capacity price environment, we've also been making good progress on landing tenants directly for one or more onsite behind-the-meter data center projects. At Longridge, we own ample acreage adjacent to our power plant and continue to engage with multiple parties for the lease of property and utilization of a substantial portion of our power generation. Data center demand in the PJM region is projected to exceed 15 gigawatts over the next five years, and efficient, readily available gas plants like Longridge have the potential to benefit greatly in the coming years. To wrap up, we're pleased with the quarter and expect the remainder of 2024 to reflect continued momentum. I'll turn the call back to Alan. Thank you, Ken.

Victor, you may now open the call to Q&A.

Thank you. And at this time, we'll conduct a question and answer session. As a reminder, to ask a question, you need to press star 1-1 on your telephone and wait for a name to be announced. To withdraw your question, please press star 1-1 again. Please stand by. We'll compile the Q&A roster. One moment for our first question. Our first question will come from Juliano Belloni from Compass Point. Your line is open.

Good morning. It's great to see you continue your performance, making progress on all the assets.

Thank you.

First question on Transar. I'm curious what percentage of revenue was third-party at Transar when you first completed the acquisition compared to where you are, where third-party revenue stands today?

Yeah, thanks, Juliano. When we bought the business, it was almost entirely a U.S. steel revenue base. About 95% of the revenue came out of U.S. steel. Today, we are in the low 80s. We're below 85% of revenue coming from U.S. steel, and I think by next year, we'll be down into the 70s. Our ultimate goal is to get that business organically to something in the mid-60s derived from U.S. Steel and the remaining third of the business from third-party customers. Obviously, if we're successful making acquisitions, which is something we're increasing our focus on, we'd further diversify the revenue base.

That's very helpful. And then continuing on the transfer thing, you mentioned the potential for tokens, and I'm curious if there's any particular type of short-line if you're looking at talking to transfer companies

We look at everything. I would say the ones that we tend to focus more on are any properties that have some regional overlap. We, of course, like businesses that are similar in nature to Transtar switching lines, large industrial switching lines. I think one area in which we're somewhat differentiated as a buyer is we actually don't mind individual assets that have a fair amount of concentration because, you know, we may look at a rail asset that is entirely agricultural in nature or energy liquids in nature. But we've, you know, whatever we do, we've got such a base at Transtar with U.S. Steel that, you know, all that does is further diversify the overall revenue base. And so while others may shy away from, you know, shoreline railroads that have, you know, higher concentrations in customers or commodities, we actually find that slightly more, you know, better fit for us. That's very helpful.

And then switching over to Rapano, can you update us on the cavern approvals? And then, you know, I'm curious, what impact do you think cavern approvals, you know, could end up having on the value of Rapano?

Well, it would be, I mean, significant. Look, we're going to get the permits for the caverns. That's been a lengthy process, but we'll be getting those permits during the second half of the year, this fall. And we'll be able to start construction on the new caverns as we make our way into 2025. It takes a couple of years to build out the cavern storage. I mean, look, it's a huge value driver. I mean, some of the bigger players in the industry are well aware of the value proposition of cavern storage versus above ground storage, right? It's half the cost to build. There's no maintenance involved. It's definitely a massive value driver, particularly in the eyes of some other strategic partners out there. So it's a priority for us in many ways. You know, the ultimate financial contribution will depend upon the final you know, timing and size of the cavern that we build right now. We are just focused on making sure we get the permits so we can get to work. That's very helpful.

And then, you know, maybe to start with Longridge, I'm curious if the capacity factor results from the last auction, you know, will impact negotiations that you're having with, you know, potential AI data that are customers?

Yeah, definitely. Definitely. The overall, you know, cost of power, you know, increases throughout the sector. I think it increases our negotiating leverage with behind-the-meter customers, whether it's data centers or it's any other behind-the-meter customer. We are talking to other non-data center behind-the-meter customers. We have an escalating price environment. That's a good thing for us because our costs, given we own gas, are not going up and are very unlikely to go up. And so an increasing price environment with a lot of demand for efficient new power you know, is a very good thing for us. So we're excited about it.

That's very helpful. I appreciate it. And I will jump back in too.

Thank you. One moment for our next question. Our next question will come from Brian McKenna from Citizens J&P. Your line is open.

Okay, great. Thanks. Good morning, everyone. So first on Jefferson, you know, it's great to hear that you have two more contracts. coming online next year that will generate 20 million of EBITDA. But a few questions on this, you know, when will both of these contracts commence? How should we think about the earnings ramp for these? Should we assume the full $20 million run rate will kind of come through initially or will it take a quarter or two to fully ramp? And then, you know, what's the average duration on both of these contracts?

Yep. They both... Good morning, Brian, by the way. They both commence next year. I'll go through the two contracts. The pipeline kind of expansion project commences on April 1st of next year, and that is contracted at minimum volumes representing EBITDA of $8 million annually. So we would expect to report $6 million in 2025 and then $8 million in the years forward. The ammonia export project at Jefferson South commences on July 1st of next year, and that represents at minimum volumes 12 million of annual EBITDA. So we'll experience 6 million of that EBITDA next year and then the full 12 for the years to come. The pipeline contract is a five-year contract. The ammonia export project is a 15-year contract. Both have minimum volumes for their entire duration. They're great contracts. capital required to build out the infrastructure for those is very low compared to the cash flows stipulated under the contract. So we're excited. As soon as we start, those commitments kick in. There is no ramp up. It is automatic. And so we will be at the $20 million EBITDA run rate with both contracts in place by July 1st of next year.

Okay, super helpful. Switching gears a little bit, I guess, where are you in terms of refinancing the balance sheet? I know you did a couple of things down at Jefferson with the debt there, but what about the broader balance sheet? You obviously own 100% of Transtar with no debt there. So is there an opportunity to leverage that asset to bring down the cost of capital? And then how are you thinking about the preferred over time?

Yep. We are very mindful of it and I think it's an opportunity for us at some point here in the second half of 2024. Strong momentum in the business, contracted cash flows, it's a very good credit story. And we are mapping out a highly creative refinancing that would reduce borrowing costs, provide a lot more flexibility as well. Our capital structure was put in place when FIP was spun off from FTI. And as a result, it's a slightly more restrictive capital structure than I think we'd like to have as a growth company and looking at a bunch of acquisitions. And so we have an opportunity to free up capital and give ourselves some more flexibility to do some really creative things. Yes, indeed, Transtar is an amazing asset and it is certainly leverageable. I think we're going to be pretty prudent. I don't think you'll see us put a ton of debt on Transtar. We enjoy seeing the dividends out of Transtar coming up to our parent company, but there certainly is capacity to have a small amount of debt down at Transtar with very, very attractive terms, and so we may do that. But I think it's highly likely something will occur here in the second half of the year, certainly not this month of August, just given the typical slowdown, but post-Labor Day, between Labor Day and the holidays, that's our target zone.

Got it. Okay. Great. And then just, you know, one, one more for me. And, you know, so Ken, there's clearly a lot of irons in the fire and you're working on just a number of different initiatives across, you know, all the assets. So how are you out allocating your time to effectively manage all these? And then I guess looking out over the next 12 to 18 months, you know, what do you see as the top priorities?

Yeah. Well, look, it's good to see consistent growth across the entire portfolio, and we continue to be focused on making good progress everywhere. That said, I think the things that represent the most meaningful step functions in revenue and EBITDA growth and therefore value creation are really two things. First is accretive acquisitions at Transtar. We're big fans of freight railroads. We have been for 15 plus years. And I think there are some really interesting opportunities that are presenting themselves here. And an acquisition at Transtar would be highly accretive. And so, as I mentioned in my discussion earlier, we have been staffing up with a handful of professionals who I'm excited to have coming onto the team. Um, so we can make some real headway there. I think that's a big needle mover for, for Transtar. Um, secondly, our developments at Longridge. I mean, the capacity auction results alone are an indication, you know, knock on wood of things to come. I mean, there is, uh, increasing demand, uh, throughout the nation, particularly in our region for, uh, power. And, um, I think we've got one of the assets that is best positioned, and our team is all over those opportunities. So I think it's those two things. Jefferson and Rapano are going to continue incredibly well. We've obviously got a big construction project ahead of us at Rapano. They're all meaningful, but my time, my energy is more and more focused on creative acquisitions at Transtar and the big developments at Longridge.

All right. I'll leave it there. I appreciate the time. Thanks, Ron.

Thank you. One moment for our next question. Our next question comes from the line of Sharif El Maghrabi from BTIG. Your line is open.

Good morning. Thanks for taking my questions. So I have a couple on Longridge. First, if you could tell us when the swaps run off at Longridge, and does 100% of your capacity there become merchant power once they do?

uh yes um the swaps have an average of three to five years remaining on them um they there are a number of different swaps with different maturities but they're in that range of three to five years and yes um we are a we actually today technically are a merchant plant the swaps are a financial instrument we're not committed to deliver power to any one you know counterparty uh the swaps are more of a financial instrument that's that's actually an important thing when it comes to behind-the-meter users because we are free today to provide power to, you know, others. The swaps could stay in place or they could be terminated by us, and that will depend on the specific situation. But, yes, the three to five years on the swaps, and we certainly are free to provide power to anyone in the years to come.

That's helpful. Just staying on Longridge, if you negotiate behind-the-meter data center power contract, I imagine there are issues you face related to things like backup power. So can you talk about those factors, and are the costs associated with something like backup power borne by FIP as the host?

Yeah. It depends. If you've been seeing some of the recent announcements on data center developments and transactions, they kind of run the gamut. I think in our case, yes, we would more likely bear those costs, and then we would generate higher income as a result. Things like disconnection from the grid, land availability, which we have a tremendous amount of at Longridge, and backup power are, yes, big priorities. We've been spending the past six months on backup power solutions. I think there are a handful of different solutions. for us. We are in a region that has a relatively uncongested power network, and that's a very good thing. So we have a lot of flexibility for what we might be able to do in terms of having backup power available, selling power into the grid during times it's not needed, and making it available to a data center when it is needed. The flexibility is really a key component of what Longridge has. Yeah, we're mindful of all of those elements. It is certainly detailed and not without multiple work streams. But I do think when you marry up Longridge with a number of our other peers in the space, Longridge simply checks more boxes than a lot of the other situations out there.

Thanks for taking my questions. Thank you. Thank you.

And now I'll turn the call back over to Alan and Drini for any closing remarks.

Thank you all for participating in today's conference call. We look forward to updating you after Q3.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day.