FTAI Infrastructure Inc.

Good day, and welcome to the second quarter 2025 FTI Infrastructure Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be given at that time. As a reminder, this call may be recorded. I would like to turn the call over to Alan Andrini, Investor Relations. Please go ahead.

Thank you, Michelle. I would like to welcome you all to the FTI Infrastructure earnings call for the second quarter of 2025. Joining me here today are Ken Nicholson, the CEO of FTI Infrastructure, and Buck Fletcher, 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.

Okay, thank you, Alan, and good morning, everyone. Welcome to our earnings call for the second quarter of 2025. We're going to walk through the details for the quarters we typically do, but first and foremost, we want to get into the details of two important developments for our company. Just two days ago, we announced a major acquisition that we expect to transform our freight rail segment. In addition, we plan to refinance our corporate balance sheet in a manner that materially increases our free cash flow and provides ample flexibility for future growth. These two transactions tee us up for what we expect to be a dynamic second half of 2025 and multiple opportunities for long-term growth in the years ahead. For the call today, we'll be referring to the earnings supplement, which you can find posted on our website, and I'm going to kick things off on page three of the supplement with some details on the acquisition. We signed an agreement earlier this week to acquire the Wheeling and Lake Erie Railway, one of the largest regional freight railroads in the U.S., for total cash consideration of $1.05 billion. In the freight rail sector, the Wheeling and Lake Erie has been a highly sought-after asset given its strategic location, customer diversity, and growth potential. We are thrilled to have had the opportunity to negotiate a transaction and combine it with our Transtar business. The Wheeling operates roughly 1,000 miles of track in the states of Ohio, Pennsylvania, West Virginia, and Maryland. The wheeling is a great fit for a combination with Transtar. The map on the left side of slide three says it all. The geographic overlay of the two businesses allows us to realize multiple immediate efficiencies and capitalize on a number of growth opportunities. For the latest 12 months, the wheeling generated total revenue of approximately $150 million, serving a diverse base of over 250 customers and a broad range of commodities. On slide four, we'll walk through our integration plan and our financial expectations for our combined rail platform. We expect to consummate the acquisition quickly and are preparing for closing later in this month of August. We'll close initially into a voting trust while we await formal approval for active control from the Service Transportation Board. Closing transactions like this into an interim voting trust is relatively common in the freight rail sector, and it's something we at Fortress have done a number of times since it allows us to immediately execute on the transaction and benefit from the revenue and cash flow that the wheeling generates while allowing time for the mandated regulatory process to be completed. We currently expect regulatory approval around the end of 2025. While the wheeling is held in a voting trust, we have asked John Giles, the former CEO of Rail America, to act as trustee on our behalf. John is an incredibly seasoned freight rail industry executive. He helped us grow Rail America during our ownership, more than doubling the EBITDA of Rail America over our four years of ownership. We do expect this to be a highly accretive investment, and we're targeting annual EBITDA of the combined rail companies of at least $200 million by the end of 2026. The building blocks to that target are provided in the bar chart, and I'll walk through the pieces. For the most recent second quarter, the two companies generated combined annual EBITDA as is of $150 million, with $83 million attributable to Transtar and $63 million to the Wheeling. We expect $20 million of annual cost savings to be implemented in the near term at the Wheeling, with the bulk related to network efficiencies, including quicker transit times, optimized use of assets, as well as capitalizing on purchasing power and a variety of cost savings. Our $20 million target is comprised of a detailed, line-item-based work plan that John Kearns, current CEO of Transtar, will implement, together with Wheeling's senior management team. We expect the entirety of these savings to be implemented in the next 12 months. The next two components relate to high-confidence revenue opportunities. The first is a unique opportunity related to our Rapano Terminal. Our Phase 2 project at Rapana will handle large volumes of natural gas liquids for export. Those liquids include propane and butane being sourced from fractionators located directly on the wheeling's rail system. Starting late next year, a unit train each day will be loaded representing 80 carloads daily or about 30,000 carloads annually. At current market rates per carload, that represents $20 million of annual EBITDA at the wheeling. Recall that those volumes are contracted at Rapano for a total of five years, so we have high visibility into that revenue stream. The second revenue opportunity is at Transtar, where additional freight volumes into and out of U.S. Steel's facilities will be substantial as a result of the commitments made by Nippon Steel. Nippon has committed to invest a total of $5 billion to expand production specifically at U.S. Steel's Pittsburgh, and Gary, Indiana facilities. We expect these investments to result in 10% to 20% increases in shipments, or approximately $15 million of annual EBITDA. Nippon is also committed to building a new production facility, which may be located on one of Transtar's existing rail lines. If that transpires, we expect substantial additional EBITDA not included in this bar chart. The bar chart also excludes continued pricing gains, third-party revenue growth at Transtar, and a pipeline of new business opportunities at the wheeling. Given the diversity and growth profile of the combined business, we believe we now own a rail asset that could trade at industry multiples that historically have averaged 15 times EBITDA. With at least $200 million of targeted annual EBITDA, after deducting $1 billion of preferred stock at the rail level that I'm going to discuss shortly, That implies significant value creation that ultimately flows to our common shareholders. I'm now going to shift to the financing that we are closing together with the acquisition. The financing has two components. First, we're issuing preferred stock at a newly formed subsidiary that will own the combined Transtar and Wheeling assets. Total preferred issuance is $1 billion, with proceeds used to fund the bulk of the acquisition purchase price. The preferred is being purchased by affiliates of Aries Management and will carry a 10% annual dividend rate, which will be non-cash paying, meaning all the cash flow generated by our combined rail business will be available at our corporate holding company level. The preferred will also receive warrants at the rail company that allow the investor to participate at a strike price at our investment basis in the value that we create over time. The warrants are only being issued at the rail entity and not at our publicly traded parents, so there is no dilution to our publicly traded equity. Secondly, at the corporate level, we are issuing $1.25 billion of new debt to refinance our existing 10.5% senior notes and our existing Series A preferred stock and fund working capital. The new debt will carry an interest rate of S plus 400, or roughly 8.25% annually, having a positive impact on our leverage and cash flow positions. Cash fixed charges today at FIP of just over $130 million annually will drop by $30 million to just over $100 million annually going forward. Cash generated by our rail business and distributed up to FIP will more than double on a pro forma basis for the acquisition. So coverage ratios and excess cash generation will be materially higher going forward. The $1.25 billion in corporate debt is initially being funded in the form of a short-term bank loan which we plan to refinance during the fall this year with a new long-term bond issuance. We expect the terms of the new bond to be less restrictive than our existing debt, providing flexibility and access to additional debt in the future to continue to invest in accretive opportunities. Now onto our current business. On the quarter, adjusted EBITDA was $45.9 million for 2Q, up 30% from the first quarter of 2025 and up 34% from the second quarter of last year. Sequentially, Bada grew at each of Transtar, Longridge, and Jefferson. Rapondo, the second quarter, continues to reflect only Phase I operations, while we progress construction at our highly accretive and contracted Phase II trans-living systems. With contracted business commencing during the remainder of this year and the wheeling acquisition, we expect 2025 to be transformational for our company, demonstrating substantial growth in revenues and EBITDA. As the bar chart on the right side of the slide illustrates, we have a line of sight across our portfolio on just over $350 million of annual EBITDA before the impact of the acquisition. Including the acquisition, we expect annual EBITDA to exceed $450 million. Importantly, our targets exclude a number of growth opportunities, including additional volumes at Transtar, data center developments at Longridge, and Rapano's Phase III terminal project. Touching upon the key highlights at each of our companies, at Transtar, adjusted EBITDA of $20.7 million was up 4% from the first quarter as volumes, average rates, and revenues remained steady for the quarter. During the quarter, Nippon Steel officially closed on the acquisition of U.S. Steel. And in doing so, crystallized the commitments for substantial investments in U.S. Steel's largest production facilities in Pittsburgh and Gary. We've already seen some pickup in volumes here in the third quarter and expect the bulk of volume increase to impact 2026 and the years ahead. At Longridge, reported EBITDA for the quarter was $23 million, up from $18.1 million in Q1. The second quarter results included the impact of a 14-day planned maintenance outage. and reflected only a portion of the increased capacity revenues which commenced on June 1st. By the end of this third quarter, we expect Longridge to reach annual run rate EBITDA of 160 million, which includes the impact of increased gas sales coming out of our West Virginia resources commencing production in this month of August. At Jefferson, EBITDA was 11.1 million, up from 8 million in Q1 as we brought four storage tanks previously off-lease into service at the beginning of the quarter. It's an important second half of the year ahead for Jefferson as we have $20 million of long-term annual EBIT documents and two contracts, each with minimum volume commitments. And at Rapano, we completed financing for our Phase 2 transloading project. We issued $300 million of tax-exempt debt at average pricing of 6.5% to fund construction and a number of reserve accounts. Importantly, we signed an additional letter of intent for our Phase 2 project, bringing our total volumes under contracts and LOI to just over 70,000 barrels per day and representing a total of approximately 80 million of annual contracted EBITDA. Starting on slide 10, I'll get into some more detailed quarterly figures at our segments before wrapping up the call. Digging a little bit more into Transtar, we posted revenue of $42.1 million and adjusted EBITDA of $20.7 million in Q2 compared to revenue of $42.6 million and adjusted EBITDA of $19.9 million in Q1. Car loads, average rates, and revenues for the quarter were largely unchanged versus last quarter. Operating expenses also continue to be stable as fuel costs and other material cost items have than largely unchanged. Earlier on the call, I described our expectations resulting from Nippon's acquisition of U.S. Steel, but we continue to drive third-party customer growth on each of Transtar's railroads. Also, while the combination with Wheeling is our primary focus in the near term, we are actively pursuing additional acquisitions of complementary railroads that further diversify our revenue and commodity base and open up additional growth opportunities through an expanded platform. We very much expect freight rail to grow as a percentage of our total assets in the quarters and years to come. Next on to Longridge. Longridge generated $23 million of EBITDA in Q2 versus 18.1 in Q1. Power plant capacity factor was 83% reflecting the 14-day maintenance outage that we took in May. We typically take outages twice a year and try to plan them during periods of lower power demand in the spring and early fall to minimize the financial impact. In 2Q, the outage represented approximately $3 million of EBITDA that did not materialize while the plant was down. Gas production averaged about 64,000 MMBTU per day. We're bringing our West Virginia gas production online later this month, resulting in a substantial increase in production and allowing us to generate incremental revenue in EBITDA from excess gas sales. Higher capacity revenues kicked in on June 1st, representing approximately $30 million of additional annual EBITDA. As I mentioned earlier, the reported results of Q2 reflect only this one month of the higher capacity revenue, so we expect to report significantly higher results in Q3 just by virtue of reflecting a full period of capacity revenue. And the 20 megawatt up rate in our power generation continues to advance, and we expect to receive authorization at some point here in the remainder of 2025. With a solid first half of the year behind us, our focus now is advancing multiple behind-the-meter projects, including most notably negotiations with data center developers. Based on the current state of discussions, we continue to anticipate entering into one or more transactions for data centers at Longridge during the remainder of 2025. On to Jefferson. Jefferson generated $21.6 million of revenue and $11.1 million of adjusted EBITDA in Q2 versus $19.4 million of revenue and $8 million of EBITDA in Q1. Volumes were higher in the first quarter and average realized price per barrel was higher as the four tanks which were previously off-lease returned to service on April 1st. As discussed, we have two contracts representing a total of $20 million of incremental annual EBITDA commencing during the second half. In addition, we are in late-stage negotiations for additional contracts with multiple parties to handle conventional crude and refined products, as well as renewable fuels, with some of these negotiations involving business that would commence this year in 2025. And closing out with Rapano, we closed our tax-exempt financing for Phase 2 in May. Construction is well underway for the above-ground storage tank, manifolds, and additional rail unloading capacity. We have two customers signed up under the long-term contracts and the additional customer with whom we're advancing the letter of intent. In the aggregate, these three pieces of business represent volumes of 71,000 barrels per day and 80 million of annual EBITDA. The two contracts are each for five-year terms commencing upon completion of the phase two construction, while the third letter of intent is for five years with a two-year extension at the option of our customers. Phase two remains our current priority, but we're excited about the advancement of the next phase at Rapano, including the development of additional underground storage, for which we expect to complete permitting prior to the end of this third quarter. In conclusion, we are extremely happy with our team's progress during the first half of the year. We're even more excited than ever about the opportunities that lay ahead. The wheeling acquisition and the refinancing transform our company and set the stage for meaningful growth in the quarters to come. I'll turn the call back to Alan. Thank you, Ken.