FTAI Infrastructure Inc. Q2 FY2025 Earnings Call

Good day, and welcome to the Second Quarter 2025 FTAI Infrastructure Earnings Conference Call. As a reminder, this call may be recorded. I would now like to turn the call over to Alan Andreini, Investor Relations. Please go ahead.

Thank you, Michelle. I would like to welcome you all to the FTAI Infrastructure Earnings Call for the Second Quarter of 2025. Joining me here today are Ken Nicholson, the CEO of FTAI 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 quarter as 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 set 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 3 of the supplement with some details on the acquisition. We signed an agreement earlier this week to acquire the Wheeling & 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 & Lake Erie has been a highly sought-after asset given its strategic location, customer diversity, and growth potential, and 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 3 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 4, 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 this month of August. We'll close initially into a voting trust while we await formal approval for active control from the Surface 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 RailAmerica to act as trustee on our behalf. John is an incredibly seasoned freight rail industry executive. He helped us grow RailAmerica during our ownership, more than doubling the EBITDA of RailAmerica 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 Jon Carnes, 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 Repauno terminal. Our Phase 2 project at Repauno 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 Repauno 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 15x 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 Ares 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 parent, 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 the S plus 400 or roughly 8.25% annually, having a positive impact on our leverage and cash flow position. 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 on to 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. Sequential EBITDA grew at each of Transtar, Long Ridge and Jefferson. And Repauno in the second quarter continues to reflect only Phase 1 operations while we progressed construction at our highly accretive and contracted Phase 2 transloading system. 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 Long Ridge and Repauno's Phase 3 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 the volume increase to impact 2026 and the years ahead. At Long Ridge, 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 1. By the end of this third quarter, we expect Long Ridge 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 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 EBITDA commencing under two contracts, each with minimum volume commitments. And Repauno, 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. Carloads, 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 been 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 Long Ridge. Long Ridge generated $23 million of EBITDA in Q2 versus $18.1 million 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 and EBITDA from excess gas sales. Higher capacity revenues kicked in on June 1, 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 upgrade 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 Long Ridge 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 1. 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 Repauno, we closed our tax-exempt financing for Phase 2 in May. Construction is well underway for the aboveground 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 2 construction, while the third letter of intent is for five years with a two-year extension at the option of our customer. Phase 2 remains our current priority, but we're excited about the advancement of the next phase at Repauno, 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 now turn the call back to Alan.

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

And our first question comes from Giuliano Bologna with Compass Point.

Congrats, Ken, on continued execution on the Wheeling transaction. As a first question, can you talk a little bit more about the synergies of putting Transtar and Wheeling together?

Yes, absolutely. We've been active in the freight rail space now for roughly 20 years between RailAmerica, where we made a number of acquisitions, the FEC and the Central Maine & Quebec. And so combinations, acquisitions, integration of rail assets is something we and our management teams have had a good amount of experience in. I feel really good about the $20 million of annual savings between the two companies. It's a long list of individual items, but they're very discrete. There's a little bit of upfront cost to implementing these savings. But once you invest, you stick with them. I mean the map on the first slide of the presentation, I think, was very important. I mean this is a perfect fit and the types of efficiencies that we can realize immediately upon closing of the transaction are incredibly meaningful. I am highly confident that the $20 million of annual cost savings is something we will certainly be realizing in the next 6 to 12 months.

That's very helpful. And then as a follow-up, you spoke in the past about the importance of diversification in the short line rail space. Can you expand on that and the implications that this deal has on the combined transfer?

Definitely. Yes, I'm glad you asked that. I do think that this transaction is a game changer for the overall value proposition of our rail platform. Diversification, I mean, Transtar is a super rail asset, and it's been growing, generating significant cash flow. It has some great attributes. It does not have a tremendous amount of diversification in terms of its customer. Transtar is 85% of our existing business. Pro forma for the combination with the Wheeling, Transtar, U.S. Steel will become one-third of our total business. We're adding 250 customers and a whole bunch of different commodities into the mix for the combined company. What that means is, as I said in some of my prepared remarks, I think it's a significant uplift in the implied multiple when you think about valuing the business. Diversified freight railroads consistently trade in the mid-teens. There have been probably 20 transactions over the past 5 to 10 years in the rail space, including a big one most recently with the UP, Norfolk Southern news, which, by the way, occurred at just north of 15x EBITDA. I really feel comfortable that now we have a business that trades in line with those industry multiples, and that's great. I'm not sure Transtar on a stand-alone basis would trade at that multiple. It might, it might not, maybe it's a 12 or something like that, but the diversification gives us that kind of multiple expansion opportunity. And I think it's a big thing for our common shareholders.

Our next question comes from Greg Lewis with BTIG, LLC.

My first question is a follow-up on Giuliano's inquiries about the rail sector. You mentioned the Union Pacific deal, and with your recent acquisition of Wheeling, has anything changed in the past year that might be contributing to an increase in consolidation within the rail industry? Do you see further opportunities to potentially acquire additional short rail lines?

Yes. I won't comment much on the UPNS deal. We have a very business-friendly administration, and that likely contributes to the current atmosphere. Generally, our experience has been that rail transactions and M&A activity occur in waves, and there have been several transactions over the past year. We are aware of many opportunities coming up in the next year and are in discussions with a few parties. Nothing fundamental has changed in the industry, which has a long history of about 150 years. However, we are noticing a slight increase in activity. More importantly, as a buyer, we are now more effective and competitive than we were last quarter. The merger with Wheeling gives us the scale to integrate more railroads, whether they are regionally focused or not, and to finance additional acquisitions more easily and at a lower cost. We are hopeful for a good pace of opportunities and believe we are better positioned to pursue them than we were before. We are excited about that.

Okay. Great. And then just on Long Ridge, I appreciate the prepared comments. As we kind of think about the opportunity there in the EBITDA bridge, you called out $70 million of opportunity. Could you maybe talk what's in there and potentially what's not in there? It looks like it came down sequentially. Clearly, I'm kind of curious about the 20 megawatts that you potentially have in development and anything else that maybe you could comment. Maybe you mentioned data centers again. Could you kind of talk about what's in that $70 million and what's not?

Yes, I'm glad you asked. We focus on communicating revenue and EBITDA in the bar chart. The $70 million you mentioned appears to have decreased. In the bar chart, we display the total contracted EBITDA for each asset and highlight the increment from what was reported in the most recent quarter. The expectation for Long Ridge remains at $160 million. Over time, we'll shift more of it into the left bar and reduce what’s anticipated as we progress through several quarters. Long Ridge has been a dynamic segment due to financing activities and business consolidation in Q1, along with increased capacity revenues in Q2. In Q3, we will see significantly higher EBITDA from Long Ridge as we reflect the full quarter's capacity revenue and excess gas sales. As time goes on, I expect the left bar to grow larger, while the increments on the right will become smaller, assuming no other changes occur, because more financial contributions will be reflected in the results. Additionally, there are data center opportunities we haven't included, which could potentially add $75 million of annual EBITDA. This is not represented in the bar chart. The new capacity revenue and auction results for 2026 and 2027, which have reached a new record, are not included either. For instance, PJM capacity revenue for next year has increased from $270 to $329 per megawatt day, which is a new record. Other rate increases and business elements are also not reflected in the bar chart; only what is contracted is shown there.

Our next question comes from Brian McKenna with Citizens.

Congrats on all the announcements this week. Ken, it would be great to get an update on Phase 3 and the caverns at Repauno. Where do things stand in terms of finalizing the permitting process? And then can you just remind us of the financials of the project, what the timeline could look like from start to finish? And then really, how are you thinking about the long-term value creation opportunity here?

The permitting process for Phase 3 has indeed been lengthy. We do not control the permit, as the final decision lies with the New Jersey DEP. We expect to receive the signed final permit by September 30, and we have no reason to doubt that timeline. Phase 3 could be very significant for us. Our initial plans involve developing two underground caverns, each with a capacity of 600,000 barrels, totaling 1.2 million barrels. The estimated cost for this development is around $200 million. Caverns offer the advantage of being more cost-effective to construct and having a long lifespan, making them easier to maintain. With an upfront capital investment of $200 million, and based on our Phase 2 contracted rates, this project is projected to generate approximately $100 million in EBITDA, resulting in a payback period of two years, with assets that could last for 50 to 100 years. This makes it an attractive investment. We have financed this with additional tax-exempt debt and successfully raised $300 million in the market during Q2. Initially, we launched that transaction with a 7.5% coupon due to high demand, we reduced it to a 6.5% blended coupon. We are very pleased with the investor support in that deal and are eager to return to that market for more capital for Phase 3 when we are prepared to move forward.

Okay. That's great. And then I guess just one follow-up there. Just in terms of the construction timeline for Phase 3, I mean, roughly how long will that be?

It's about two years, about two years from beginning to end.

Yes. Got it. Okay. Cool. And then a follow-up on Repauno as well. Just Phase 2 construction, how is that going thus far? And then I guess just from the outside, are there any major milestones we should be watching just in terms of the progress there and ultimately marching toward the 4Q '26 start date?

Yes. Everything is on time, on budget, going great. The team that is administering construction is the same team that built everything we own today at Jefferson. I mean, Jefferson is on the construction front, a great success story. Virtually everything we built at Jefferson has been on time, on budget. A good chunk of what we built was during the pandemic with supply chain issues, but the team did a remarkable job keeping things in line with budget and time frames. Essentially, it's just going to be a continuous process. I can't say there are particular milestones per se. We need to complete the project in Q3, so we can commission and have it operating in Q4, and I'm confident our team is going to be able to do that.

Okay. Great. And then just last one for me on Long Ridge. Just given all the demand for power in the PJM, have you seen an increase in reverse inquiries for both power as well as the power plant?

Yes, we are certainly receiving a lot of inquiries about Long Ridge. There is significant interest in the asset. The power sector is currently very dynamic, and owning one of the most reliable and efficient power plants in North America that can also blend hydrogen is a major advantage, especially with ample adjacent land in a very business-friendly state. We are actively engaging in discussions with several interested parties. While our primary conversations are with data center developers, there are various other stakeholders interested in either power or larger developments at Long Ridge. I would be surprised if we don't see some development in the upcoming months. As I noted earlier, we are on track to announce something before the end of 2025.

Our next question is a follow-up from Giuliano Bologna with Compass Point.

I want to recap because a lot has happened this year. At the start of the year, you mentioned your goals to refinance at Long Ridge and complete related transactions. You also aimed to secure financing for Phase 2 at Repauno, recap the holdco balance sheet, and pursue a significant rail acquisition. You have achieved all of those objectives this year. Looking ahead, I am interested in what you are planning to accomplish or finalize this year and next year.

I appreciate that. It has certainly been a busy first half of the year, and I’m really pleased that we’ve managed to put those recent announcements behind us. Our top priority is ensuring the successful integration of Wheeling following its acquisition. Moving forward, we will continue to focus on growing the freight rail segment, which we are passionate about and have extensive experience in. There is still significant value to be created in freight railroads. Over time, our other assets will constitute a smaller share of our total assets and cash flow. As those assets become more stable, we may consider monetizing some of them at projected valuations. Ideally, I would like to sell off some of those assets to invest in additional freight railroads. Ultimately, it’s possible for our company to transform into a publicly-traded freight rail business, similar to RailAmerica and other successful public companies in that space. While I can't make any promises and it’s a long-term plan, we will likely pursue more acquisitions in freight rail and potentially monetize parts of our other businesses as well.

That's extremely helpful. And maybe to jump in with one kind of follow-up on the margin there. I think in the past, you kind of talked about obviously, a lot more activity in the freight rail M&A world and that there's a handful of larger properties. I'm assuming Wheeling being one of those larger properties that you're referring to in the past, and then some other small tuck-ins that could be out there for sale or acquirable. In the near term, are you seeing opportunities for smaller high single-digit EBITDA or low double-digit EBITDA assets? Or are you seeing more opportunities for assets that are closer to the size of Wheeling in the market?

Yes. There is a steady flow of smaller businesses and assets, but they tend not to significantly impact us. We will focus on larger opportunities, ideally those that reach double-digit EBITDA levels. If we come across an opportunity that is particularly local or a simple tuck-in, we would consider that, but it likely won't have a substantial effect. We are more focused on other short line and regional railroads, as well as some of the switching lines, like Transtar in the agricultural sector. Transtar isn't the only railroad owned by a large industrial firm. There are many chances for larger companies to sell off their internal rail operations, and we are engaging in discussions with some of those owners. This is a vast industry with over 500 short line and regional railroads, many of which have already been consolidated. Therefore, there is potential for more significant transactions, and I anticipate numerous opportunities will arise in the next 6 to 12 months. I am optimistic about our competitiveness in those situations.

That's extremely helpful. And congrats on the execution this year.

Thank you. I'm showing no further questions. This does conclude the program, and you may now disconnect. Everyone, have a great day.