Cabot Small-Cap Confidential Issue: August 1, 2024

The Big Idea

While it’s true that the U.S. still has an infrastructure problem, real progress is being made.

The Infrastructure Investment and Jobs Act (IIJA), signed into law in 2021, and the Inflation Reduction Act (IRA), signed into law in 2022, represent two historical investments in the American economy, in energy security and in the battle against climate change.

Between the two there is a total of $1.25 trillion – spread over five to 10 years – to be distributed across the transportation, energy, water resources, and broadband sectors.

The IIJA is focused on more traditional infrastructure spending, while the IRA represents a massive commitment to finally address climate change through roughly $275 billion in funding (most via tax credits) on energy-focused programs.

This chart from the Brookings Institute shows the combined reach of the two bills.

Today we are jumping into a small-cap, pure-play infrastructure company that’s benefiting from the infrastructure bills while building out a portfolio of businesses across the railroad, energy and industrial products industries.

The management team’s acquisition strategy is focused on assets used by major operators of infrastructure networks in the U.S. Companies like Exxon (XOM), BNSF Railway and Motiva (Saudi Aramco subsidiary).

It operates in traditional energy markets, like crude oil and liquid petroleum gas (LPG) but is going deeper into clean energy markets too.

In fact, a wave of recent investments is aimed directly at clean energy markets.

The company is also a major owner of a power plant in the heart of Ohio that’s seeing a ton of inbound demand from data centers.

The Company

FTAI Infrastructure (FIP) is a $1 billion market cap infrastructure company with investments across the transportation, energy, clean energy and industrial products markets.

It operates like a private equity company, focused on generating and growing positive, stable cash flow and EBITDA (a measure of earnings before deducting interest, taxes, depreciation and amortization) from a portfolio of diverse companies and assets that have long-term growth potential.

FTAI currently owns six freight railroads and a switching company (Transtar), a multi-modal crude oil and refining terminal (Jefferson Terminal), a deep-water port with multipurpose dock and underground storage (Repauno), an equity interest in a power plant (Long Ridge) and an equity interest in clean tech companies that recycle batteries (Aleon) and metal (Gladieux).

As you’d expect, major customers are global industrial and energy companies that manufacture goods, refine crude oil, trade in petroleum products, require electricity, etc.

Management looks for unique opportunities, both large and small, sometimes in distressed, undervalued and overlooked assets, where a fresh strategy and active management can add value.

One recent opportunity is in data center electricity demand. In the area of the company’s Long Ridge power plant (Ohio) data center demand is expected to go from 3 gigawatts of power to 17 gigawatts over the next five or so years. The company sees significant opportunity in this market.

The team has shown a knack for pursuing attractive follow-on investments, with current projects at Jefferson Terminal, Long Ridge and Repauno standing out as great examples.

In short, FTAI is a pure-play infrastructure company that is not yet well-known but has been assembling the pieces to become a much larger player in the infrastructure market.

It pays a dividend, equal to a roughly 1.2% yield.

Portfolio Companies

FTAI is organized into five operating segments, each of which represents strategic business units with investments in different types of infrastructure assets.

Here’s a quick look at each of the five units.

Transtar

Transtar is a railroad business that’s been part of the country’s industrial development since the late 1800s, moving billions of tons of raw materials and finished products to hundreds of customers via seven locations, 285 miles of track, 34 interchanges and 4,000 storage locations.

It consists of a switching company (Delray Connecting) operating in Detroit, Michigan, and six short-line freight railroads operating in Ohio, Alabama, Texas, Indiana and Pennsylvania, two of which connect U.S. Steel’s largest North American production facilities.

FTAI acquired 100% of Transtar from U.S. Steel (X) in July 2021 for $640 million. At that time, it was only used by U.S. Steel and there were virtually no other customers. That’s changing, and it’s a good thing. Transtar has no debt.

It is the heavy hitter in FIP’s portfolio, generating $169 million in revenue in 2023 (67% of company total) and $78.5 million in Adjusted EBITDA. Carload volumes and average rate per car have been hitting records lately.

Jefferson Terminal

Jefferson is a crude oil and refined products logistics terminal on 250 acres at the Port of Beaumont, Texas, a deep-water port right in the heart of the U.S. Gulf Coast. It is the only multi-modal terminal complex in Beaumont and provides an important link between crude oil producers, refineries and end consumers.

It can handle throughput of 400,000 barrels per day (bpd) at 90% utilization and should generate around $75 million of annual Adjusted EBITDA at that level. It is 80% owned by FTAI, with the other 20% owned by employees.

The main terminal was completed in 2023 and has six rail loop tracks and direct rail service from three railroads (25+ miles of rail), several direct pipeline connections to local refineries and interstate pipeline systems, three marine docks, 6.2 million barrels (and growing) of storage tanks (both unheated and heated, which is good for heavy crude) and prime location near refineries (at Port Arthur and Lake Charles) with over 2.3 million barrels per day (bpd) of capacity.

Jefferson Terminal also owns a 600-acre industrial property in Nederland, Texas called Jefferson Terminal South (acquired in late 2022) where construction is ongoing for a new ship dock to handle clean fuels like ammonia. A 15-year ammonia export contract was recently signed, with more expected.

Work is consistently going on at Jefferson Terminal to expand capacity (second dock and 10 tanks and infrastructure added in 2023) to grow. In 2023 Jefferson generated revenue of $72 million (29% of company total) and $35.7 million in Adjusted EBITDA.

Repauno

Repauno was acquired in 2016 and is one of the newest marine terminals on the Delaware river. It is a deep-water, multi-modal storage and logistics terminal located on 1,600 acres in Gibbstown, New Jersey. It transloads natural gas liquids and renewable fuels across state-of-the-art multipurpose docks (completed in early 2021) and offers storage in natural underground granite storage caverns.

Repauno can handle a wide variety of freight and is expanding storage and transloading capacity as part of a “Phase 2” expansion. New, sustainable energy projects, including exports of green hydrogen and development of a recycling facility (Clean Planet USA) are also in the works.

Repauno generated $11 million in revenue in 2023 and -$8.1 million in Adjusted EBITDA. Results were weighed down by losses on the sale of butane inventory as the terminal prepared for a new contract.

Long Ridge Energy & Power

Long Ridge is a vertically integrated power and gas terminal located in Hannibal, Ohio. It includes a 485-megawatt combined-cycle gas power plant, working interests in natural gas production wells and a transloading port and rail terminal.

This is one of the most energy-efficient power plants in the world and in 2022 began blending hydrogen into its fuel mix, which reduces CO2 emissions. Industrial energy users turn to Long Ridge to get low-cost, long-term power.

The recent surge in AI-related power demands has led to significant interest from data center owners and AI companies.

FTAI owns 50.1% of Long Ridge. The other half was sold for $150 million in 2019. The company does not record revenue from the business since it doesn’t have a “controlling interest.” It records its share of earnings from the business as well as interest income (around 13%) from a loan provided to the buyer of the other 50% share. In 2023 Long Ridge generated $34.8 million in Adjusted EBITDA (+93%).

Sustainability & Energy Transition

FTAI has gone deeper into sustainable business via a number of recent investments.

It currently owns a 27.4% equity interest in both Gladieux (recycles spent catalyst produced in the petroleum refining process) and Aleon (lithium-ion battery recycling). It also created a Joint Venture (JV) with Clean Planet Energy to develop ecoPlants for processing plastic waste. The first plant is under development at Repauno. Lastly, FTAI has an ownership stake in CarbonFree, a carbon dioxide capture, use and storage company.

These businesses are not yet generating revenue and generated an Adjusted EBITDA loss of -$7.3 million in 2023.

Corporate & Other

“Corporate” includes no revenue as it’s just the costs of the parent company that runs the various businesses. “Other” includes one small business that FTAI recently bought called FYX. FYX provides roadside assistance for fleet managers, drivers, etc. It is a mobile and web-based app that handles quotes, dispatch, billing and repair services. It’s not a bad business at all and grew by 42% to generate $68.2 million in revenue last year.

Growth Initiatives

Transtar Expansions: A new railcar repair facility began operating at Union Railroad (in PA) in Q1 2023 and is ramping up to capacity. Transtar also took over a 41-mile section of track from Norfolk Southern (NSC) in June, adding EBITDA. Several 3^rd party freight opportunities are currently in the works to continue building the business beyond U.S. Steel. Pricing is also going up.

Jefferson Expansion & Contracts: As a relatively new terminal (completed last year) Jefferson’s throughput and revenue are ramping quickly, and management is working on several, long-term contracts (two at Jefferson Main Terminal, and two at Jefferson Terminal South for ammonia, a clean fuel) which management believes could drive roughly $75 million of incremental annual Adjusted EBITDA. Jefferson Terminal South has potential to become a clean energy hub.

Repauno Phase 2 Expansion: Will quadruple the capacity of natural gas handled at the terminal and should add roughly $40 million in annual Adjusted EBITDA once complete. Cost to build is around $200 million, funded entirely with tax-exempt debt.

Long Ridge Data Center Opportunity: Management has been fielding a lot of interest from potential data center customers to use a significant portion of power capacity. The business currently generates revenue of just under $0.03 per kilowatt hour, whereas the going rate for AI data centers is around $0.08. Suffice to say, a nearly 3X increase in revenue for the same power generated today represents a significant increase in EBITDA.

Company History & Business Model

FTAI Infrastructure operates somewhat under a private equity-type business model, a reflection of the company’s history and focus on generating positive cash flow and earnings from a portfolio of companies and investments.

The company was originally part of FTAI Aviation (FTAI) and was spun out in August 2022. It is externally managed by an affiliate of Fortress Investment Group (the private equity firm) which, as of 2023, is owned by Mubadala, one of the sovereign wealth funds of Abu Dhabi.

This history and ownership structure gives you a picture of how these private equity-type companies operate. They’re always involved in business dealings to try and generate positive returns.

The Bottom Line

In 2023, revenue (which excludes Long Ridge) grew by 22.3% to $320.5 million and Adjusted EBITDA (which includes Long Ridge) grew by 76% to $107.5 million. Growth was fueled by an increase in carloads and rates per car at Transtar, higher throughput volumes at Jefferson Terminal and the acquisition of FYX.

The company had $1.34 billion in net debt at the end of Q1. It has since refinanced some debt related to the Jefferson Terminal at more favorable terms. We’ll get a new balance sheet with the Q2 report.

In Q1 2024, revenue grew 8% to $82.5 million, and Adjusted EBITDA grew 24% to $27.2 million.

Second-quarter 2024 results come out today after the closing bell. Consensus analyst estimates call for revenue of $93.8 million (+14.6%) and Adjusted EBITDA of $36.4 million (+31%). Full-year 2024 revenue is expected to grow by 20% to $384 million while Adjusted EBITDA is seen up 50% to $162 million.

Risk

• Customer concentration is high now, though it should become more diversified as assets ramp up activity. FTAI generated 51% of revenue from one customer in 2023.
• Business can be cyclical in energy and commodities markets and prices can fluctuate significantly.
• Interest rate risk exists given the level of FTAI’s debt, though that risk is likely decreasing given expectations for a lower federal funds rate in 2025.
• Management could make a poor acquisition or investment decision that takes time to unwind.

Competition

Primary competition in the infrastructure market comes from traditional infrastructure companies, midstream energy businesses, terminal operators, bulk goods transport companies, banks, private equity funds and hedge funds.

The Stock

Trading Volume: FIP trades an average of 1.5 million shares daily ($15 million). We’re not likely to have much of an impact here.

Historical Price: FIP was a roughly 4.0 stock when it was spun out in 2022. The stock sold off afterward (tough market) and didn’t get back to the 4.0 level until the end of 2023. Early 2024 brought another drawdown but FIP was back into the mid-4s in February. The major change of character came after the Q4 2023 earnings report on February 29. The stock rallied 10% the next day and kept running through the Q1 2024 report (May 7). FIP didn’t stop until it topped out at 9.3 on May 28. A quick retreat to the 50-DMA at 7.3 followed, but FIP regained momentum quickly and broke out to fresh highs at the beginning of July. The stock is now two months into its latest uptrend and has recently been trying to break solidly above 10.

Valuation: FIP trades with an EV/Revenue multiple of 7.3.

Short-Term Buy Range: Expect to buy in the 9.7 to 10.5 range today, then we will reassess after this afternoon’s earnings report.

The Next Event: Q2 2024 earnings will be reported after the close on Thursday, September 5.

Current Recommendations

Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.

Glossary

Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.

Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.

The next Cabot Small-Cap Confidential issue is scheduled for

September 5, 2024.

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