I initiate coverage on FTAI Infrastructure (NASDAQ:FIP) with a buy rating and price target of $11/sh by 1Q2025. Cash flows from Transtar’s strong and consistent performance will enable FIP to finalize agreements on its remaining segments, unlocking accretive EBITDA by the fourth quarter of 2024. There is a high probability that the company can generate roughly $200mm in EBITDA by the second quarter of 2025, translating to an intrinsic value of $14 per share, minus a generous discount for potential project delays.
Company Overview
FTAI Infrastructure is an asset manager of American rail, crude, and natural gas infrastructure assets primarily located in Texas, Pennsylvania, Ohio and New Jersey. The firm was a subsidiary of parent company FTAI Aviation Ltd. (FTAI) until August 2022, when FIP was spun-off to develop its rail and energy assets.
FIP reports four segments, but realistically only three contribute to top and bottom-line results. These three segments consist of Railroad Services, Ports and Terminals and Power and Gas. The firm’s Sustainability and Energy Transition segment is a placeholder for noncontrolling interests and pending business developments. FIP’s railroad segment, Transtar, is its largest and most valuable unit, consisting of six short-line, Class III freight operators and one switching company. Union Railroad (URR), Transtar’s largest subsidiary, was acquired from US Steel in 2021 for $640mm and supports a 128-mile short-line network of industrial and steel businesses in the greater Pittsburgh area. Transtar’s other subsidiaries perform similar rail services near various steel operations in Indiana, Ohio, Texas and Alabama.
FIP’s second-largest division, Terminals, consists of the larger Jefferson Terminal located in Beaumont, Texas and the recently constructed Repauno Terminal of Gibbstown, New Jersey.
Jefferson terminal sits on a 250-acre site on the east bank of the Neches River ship channel at the Port of Beaumont, the fifth-busiest port by cargo volume in the US. The main terminal (Jefferson Main), is tripled-served by Union Pacific, BNSF and KCS, with additional access to interstate highways and other marine operations. Jefferson Main generates revenues from crude storage fees and throughput tolling to adjacent refineries. In 2022 Jefferson acquired Jefferson Terminal South, a 600-acre site which is under development to become a hydrogen and ammonia export facility served by existing deep-water docks and rail access.
The Terminals division also includes the Repauno Port and Rail, the newest energy liquids terminal on the Delaware River. The New Jersey-based 1,600 acre site, originally a Dupont manufacturing facility, has since been redeveloped to support bulk cargo transloading, warehousing, and O&G storage and transfer.
The Power and Gas segment (Long Ridge) operates a 485-megawatt natural gas-hydrogen power plant in Hannibal, Ohio and manages a total of 1,660 acres of subterranean gas assets in Wetzel County, West Virginia. The plant site has access to two privately owned barge docks, two LNG storage tanks with 45,000 barrels of capacity, and 27 miles of short-line rail connecting to Norfolk Southern lines in Mingo Junction, OH, operated by Transtar’s East Ohio Valley Rail company.
FIP’s fourth segment, Sustainability and Energy Transition, comprises minority interests in plastics and battery recyclers, and other clean-energy interests located near FIP’s core operations. The Sustainability and Energy Transition segment is not a meaningful contributor to FIP’s top or bottom line.
Projections used for fair value calculation. (Company Filings, Author’s work. )
Rail
Transtar and its subsidiaries will remain the engine of FIP’s value for the foreseeable future. The completion of the railcar repair facility at URR (Pittsburgh, PA) in the first quarter expands business beyond legacy steel customers. Management has highlighted East Ohio Valley Railway’s 17-mile track extension to Bellaire, Ohio, increasing its control of lines around the Long Ridge Hannibal power plant to the south. Growing third-party revenues de-risk a secular decline in American steel manufacturing activity and smooth earnings volatility in the company’s energy segments. Following the first quarter, management expects $30mm to $35mm in annual third-party revenue, with an incremental $10mm per year thereafter. I am confident in the management’s ability to operate these assets through industry cycles beyond the next two years.
I see the company generating between $180mm to $200mm in run-rate EBITDA by 1Q25, including the upside from third-party customers. In the first quarter of 2024, Transtar tolled a record 62,100 carloads (+9.7% YoY) at an average rate of $661 per car (+5.4% YoY) totaling $46.3mm (+12.9% YoY) in quarterly revenue. A modest 2025 EV/EBITDA multiple of 10 implies an enterprise value of $2 billion, reflecting 85% of FIP’s total present-day $2.4 billion enterprise value. Better yet, the $562mm of corporate debt is non-recourse, leaving Transtar debt free.
FIP’s low-cost debt structure gives and ample runway for financing new projects. (Company Filings)
Terminals
The 2-part Jefferson Terminal remains in the early stages of cash-flow generation, and I expect a positive outlook in the next year from elevated crude prices and gulf coast refinery activity. Management has guided optimistic targets of $142mm of revenues and $73mm of adj. EBITDA, assuming that facilities run at 90% capacity, equivalent to 400 kbpd of throughput plus 100% utilization of the 6.2mm crude storage capacity. I model softer target revenues of $95mm and $28mm of EBITDA in the next twelve months. Crude storage capacity in the Port of Beaumont totals 59.3mm barrels, so Jefferson’s 6.2mm capacity amounts to 10.4% of total local storage supply. I remain cautious of the terminal’s ability to maintain price if demand softens. Notwithstanding, Jefferson’s market advantage rests on its competitive capabilities of handling heavier grades of crude and being Beaumont’s only multi-modal, multi-product terminal. On June 13, FIP announced an agreement with Aramco Trading Americas to provide bi-direction flow volumes to its Southern Star pipeline, further strengthening Jefferson Terminal’s ties to the surrounding pipeline networks. Although this agreement is not a guarantee of future volume increases, adding another large and reputable trading partner pushes FIP closer to its guided 400,000 bpd flow volume.
Illustrative Economics of Jefferson Terminal according to company guidance. Downside case author’s work. (Company Filings)
Additionally, Jefferson’s second site, a 600-acre property south of Jefferson Main, is contracted to handle ammonia on a 15-year basis for the first phase of New Fortress Energy’s ZeroParks 100MW green hydrogen production. In September, New Fortress confirmed its purchase of long-lead items needed for the facility, targeting commercial operations in 2025. I am confident in the feasibility of the project, however, New Fortress’ poor track record on timely execution suggests commercial operations will not begin until 2026.
In the short term, I look forward to Jefferson’s tender offer on its tax-free series 2020 bonds and subsequent refinance. Management anticipates the extension of roughly $80mm in principal due 2025, increasing equity value in Jefferson by an estimated $75mm, with additional financing cash flows directed to upgrading the Jefferson South terminal.
Long Ridge
Incremental cash flows from Long Ridge hinge on managements’ ability to secure a behind-the-meter agreement with a large data-center customer. As noted in first quarter earnings, a sizable behind-the-meter agreement would multiply the segment’s EBITDA by a factor of 2 to 3. Under current agreements, Long Ridge sells power to the PJM grid at $0.03 per kWh, generating $40mm of adjusted EBITDA on an annual run-rate basis. A contract with rates from $0.06 to $0.08 per kWh with no increase in marginal generation costs, would unlock at least $80mm in EBITDA by 2026. Ohio’s recent boom in data center construction and power consumption looks promising for Long Ridge, but contracts seem to be in the early stages and are unlikely to be announced before the end of the year.
Governance and Other Risks
The largest risk associated with FIP is its ability to execute its energy-related projects at the Jefferson South terminal and Long Ridge associated assets. I believe the board of directors has the necessary experience to produce results consistent with guidance on its Transtar and Jefferson Main division; however, the overlap in management between FIP and New Fortress Energy (NFE, -28% YTD) warrants deep skepticism on management’s ability to complete projects on time. In addition to partnering with FIP at Jefferson South, New Fortress is also a key partner in the operation and expansion of the Long Ridge Hannibal plant. According to FIP’s latest proxy filing, the “Fortress Investment Group LLC and certain affiliates” (New Fortress Energy) control roughly 11.5mm shares, or 10.2% of outstanding shares, in addition to the equity interests within FIP’s segments. Furthermore, executive compensation of FIP’s CEO is determined by the same “manager” affiliated with Fortress Investment Group.
FTAI Infrastructure operates nationally valuable hard assets that generate cash flows with significant potential upside beyond 2025. I emphasize the likelihood that guidance beyond 2026 (Repauno NGL throughputs, Jefferson South ammonia contracts, and behind-the-meter agreements for Long Ridge Energy) could look materially different than management’s current illustrations. Additionally, management’s relationship with New Fortress warrants attention regarding dilution for common shareholders. Nevertheless, I remain bullish and recognize the firm’s momentum in the right direction and see 30 to 50 percent upside to today’s share prices.
