U.S. Markets closed

Edited Transcript of FTAI earnings conference call or presentation 28-Feb-19 1:00pm GMT

Q4 2018 Fortress Transportation and Infrastructure Investors LLC Earnings Call

New York Mar 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Fortress Transportation and Infrastructure Investors LLC earnings conference call or presentation Thursday, February 28, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alan John Andreini

Fortress Transportation and Infrastructure Investors LLC - IR

* Joseph P. Adams

Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO

================================================================================

Conference Call Participants

================================================================================

* Ariel Luis Rosa

BofA Merrill Lynch, Research Division - Associate

* Brandon Robert Oglenski

Barclays Bank PLC, Research Division - VP & Senior Equity Analyst

* Devin Patrick Ryan

JMP Securities LLC, Research Division - MD and Senior Research Analyst

* Justin Trennon Long

Stephens Inc., Research Division - MD

* Robert Hudson Salmon

Wolfe Research, LLC - Research Analyst

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Quarter Four 2018 Fortress Transportation and Infrastructure Investors LLC Earnings Conference Call. (Operator Instructions)

I would now like to introduce your host for today's conference, Alan Andreini. Please go ahead, sir.

--------------------------------------------------------------------------------

Alan John Andreini, Fortress Transportation and Infrastructure Investors LLC - IR [2]

--------------------------------------------------------------------------------

Thank you. I would like to welcome you to the Fortress Transportation and Infrastructure fourth quarter and year-end 2018 earnings call. Joining me here today are Joe Adams, our Chief Executive Officer; and Scott Christopher, our Chief Financial Officer. We have posted an investor presentation in 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 FAD. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earning supplement.

Before I turn the call over to Joe, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings. These statements by their very 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 Joe.

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [3]

--------------------------------------------------------------------------------

Thank you, Alan. To start, I'm pleased to announce our 15th dividend as a public company, and our 30th consecutive dividend since inception. The dividend of $0.33 per share will be paid on March 27, based on a shareholder record date of March 15. Our dividend coverage continues to improve. Dividend coverage was 1.5x in Q3, and improved to 1.6x in Q4.

So now let's discuss some of the numbers. Q4 of 2018 was a record quarter and 2018 in total was a record year. Adjusted EBITDA for Q4 2018 was $63.1 million compared to Q3 of 2018 of $58.8 million and Q4 of 2017 of $47.8 million. As we projected, for the first time ever, infrastructure generated positive adjusted EBITDA of $2.6 million in Q4.

FAD was $57.7 million in Q4 versus $44.7 million in Q3 of 2018 and $47.2 million in Q4 of 2017. Normalized FAD without sale proceeds was $44.1 million in Q4 versus $40.7 million in Q3, and $12.9 million in Q4 of 2017.

During the fourth quarter, the $57.7 million FAD number was comprised of $82.9 million from our equipment leasing portfolio, negative $1.8 million from our infrastructure business, and negative $23.4 million from corporate. The overall infrastructure number improved significantly from the prior quarter by $7.1 million, primarily due to improved results at all 3 infrastructure segments. The CMQR Railroad, Jefferson and Ports and Terminals.

Corporate FAD was higher than Q3, primarily due to a full quarter impact of the interest expense on the $300 million in senior notes issued in September of 2018, incremental interest expense on a $100 million borrowings from our revolving credit facility and higher overall G&A corporate expenses related to year-end activities.

Let's now look at all of 2018 versus all of 2017. Those numbers were even more impressive. Adjusted EBITDA in 2017 was $136.5 million versus $222.2 million in 2018 for an improvement of 62.8%. Normalized FAD in 2017 was $55.9 million versus $137.6 million in 2018, for an improvement of 146.2%.

While I'm not going to predict these kind of growth numbers going forward every year, what is a 100% clear to me is that we are now going into a period over the next several years of significant growth.

Let me now turn to Aviation. Our Aviation business continues to perform and generate increasing and stable cash flows. Our profitability remains strong and our offering becomes more differentiated every quarter. Aviation adjusted EBITDA was $71.5 million, versus last quarter of $72.5 million, and it was down slightly due to seasonality in the fourth quarter, coupled with the timing of new investments. Our actual annualized Aviation EBITDA, excluding gain on sale, is now approximately $290 million.

Aviation net income in Q4 was lower than Q3 by $8 million, primarily due to higher non-cash expenses for depreciation and amortization, and a $1.5 million loss on the sale of several run-out engines. $3 million of that increase in depreciation is due to a larger fleet, while approximately $4 million was due to accruals for lease incentives and maintenance liabilities, which fluctuate up and down each quarter with the timing of certain lease and maintenance events. The $1.5 million loss on sale of engines resulted from our decision to scrap out certain engines acquired in a portfolio transaction, rather than overhaul them. But the good ones in that transaction we are keeping.

We closed $173 million of new investments in Q4, with most of those investments closing late in the quarter in December. On an annual basis, we closed over $400 million in new investments in both 2018 and in 2017, and we're off to a good start in 2019. We had approximately $150 million of LOIs outstanding at December 31, 2018, and have added more in 2019. We now expect our run rate Aviation FAD to be approximately $370 million per annum, after closing our current LOIs over the next 2 quarters, up from a projected number of $350 million last quarter.

The macros for the Aviation business remains strong. Passenger miles flown continue to track to the 5% to 6% annual growth rate, which has lasted or over the last 30 years, and the outlook for the engine business is even stronger. Availability of engines that power the 757 and 767 aircraft is extremely tight, as utilization in both passenger and freighter configuration for these aircraft is very high, while the engine supply is low, due to increased scrapping of engines because of rising overhaul costs.

For the A320ceo fleet in the 737NG aircraft, a surge in the number of engines coming up for the first shop visit is stressing maintenance shop capacity and parts supplies, which means the average shop visit today is 6 to 8 months in duration, versus approximately 3 to 4 months a year ago, which is great for spare engine demand. And the outlook for the next 3 to 5 years couldn't be better. Approximately 60% of the CFM56-5B and 7B engines that are flying today have not even yet had their first shop visit.

And while we are currently achieving savings of over $1 million per shop visit using module swaps, efficient parts sourcing strategies and preferred MRO relationships, starting next year, our advanced engine repair joint venture should introduce its first commercially available products, which will further and permanently lock in our cost advantage for managing commercial engines in a market that's projected to double over the next 10 years.

Now let's turn to offshore. The offshore marine industry remains in a position of significant over-supply. But after several years of constrained offshore E&P spending, down 60% since 2014, and flat over the last 3 years, the market is beginning to tighten in the inspection, maintenance and repair space. We've seen some rate improvement on recent work, but charters are still short-term. As we have previously mentioned, we are in the process of converting the Pride, our largest asset, into a well intervention vessel. With day rates of approximately $250,000 per day, the economics of well intervention are quite compelling. The front-end engineering work and design work is complete and the equipment needed has been ordered. Until that work is complete in Q1 of 2020, we will use the Pride on short-term IMR charters.

Now let's turn to infrastructure. The Central Maine & Quebec Railroad had another good quarter, carloads were up to 6,950 in Q4, a 14.6% increase versus Q4 of 2017, and net revenue was up to $9.7 million in Q4, a 16.7% increase versus Q4 of 2017. Importantly, we finally received all the regulatory certifications for our new car cleaning business, which commenced operations several weeks ago. We expect the car cleaning operation to add approximately $3 million of EBITDA annually to the CMQR, such that we expect the CMQR to generate approximately $10 million in EBITDA this year.

Jefferson now. One of the drivers of infrastructure EBITDA turning positive in Q4 was the improvement at Jefferson of $3 million in Q4 versus Q3. Jefferson would have had positive EBITDA for the first time, were not for some one-time corporate and compensation charges. Having said that, Jefferson is ramping, as we have always expected it would.

The 3 big drivers of Jefferson's current and projected growth are; one, significant volume of crude by rail, particularly from Canada; 2, rising volume of refined products moving by rail to Mexico; and 3, our expanding and deepening relationships with the current and future largest refineries in North America.

We saw substantial growth in crude in Q4, moving over 25,000 barrels a day and booking over $45 million in Q4 revenues. With the recent temporary intervention in the market by the Alberta government, Q1 volumes will be slightly reduced, but Q2 and -- through Q4, are looking quite strong. Additionally, due to production takeaway constraints in Western Canada, producers, shippers and refiners, and even the Alberta government, all see crude by rail as a major part of the crude supply chain to the Gulf of Mexico for at least the next 3 to 5 years, and we are seeing interest for term commitments and higher rail volume as tangible evidence of this.

Jefferson also completed the expansion of our refined products to Mexico loading capacity, and expect volumes to increase from approximately 12,000 barrels a day in Q4 to over 30,000 barrels a day in Q2, Q3 this year. Important for our ability to handle these strong volumes, total storage capacity at year-end was approximately 2 million barrels and will double this year to over 4 million barrels by year-end 2019, 800,000 barrels coming online in April, and 1.4 million barrels in December.

And finally and critically for the long-term growth prospects, we have commenced pipeline construction projects to connect us with several local refineries, which we expect to be operational in early 2020. So it's all coming together.

Turning to Long Ridge. We just announced the closing of the non-recourse financing at Long Ridge, coincident with the signing of the power sale agreements and the EPC and Power Island agreements with Kiewit and General Electric. Now that the financing and all the just mentioned agreements have been signed, we have begun the process of marketing a 50% interest in the plant for which we are targeting $200 million to $250 million in proceeds to us. If successful, we will have all of our equity capital out of Long Ridge while continuing to own 100% of the terminal operations and 50% of the power plant. Frac sand, which is already up and running, will generate between $6 million to $8 million of annual EBITDA and the natural gas liquids loading operation should generate $15 million to $20 million of EBITDA. So putting the 3 together, we're projecting $80 million to $90 million of annual EBITDA to FTAI with no equity remaining in the deal. Getting to FID last week on the power plant was a big step in this process.

Turning to Repauno. On Repauno, we booked $6 million in revenue from butane sales in Q4 and now we are focused on securing long-term European offtakers of natural gas liquids through the terminal. We are targeting 5 to 7 year contracts that will allow us to debt finance $50 million of capital improvements for rail to ship loading operation that should generate $15 million to $20 million in EBITDA, starting in 2020 and $500 million in capital for 3 million barrels of underground storage that should generate $150 million in annual EBITDA starting in 2022. And we are seeing strong demand from these European offtakers.

So in conclusion, we just completed our best quarter ever and our best year ever. Our Aviation business continues to grow while achieving impressive profitability metrics of 15% ROE and 25% EBITDA yield. And maybe the most important observation I can make about Aviation is that our offering is becoming more unique and differentiated every quarter. We are building the platform, which is becoming the industry leader in aftermarket engine leasing and repairs. Infrastructure, which by definition is episodic and it's a long-term ground war during the development period, has come together and is worth a lot of money. We are developing infrastructure assets at a 4 to 5 multiple, which will trade at 12 to 13x, which we can sell if we choose to at 15 to 17x.

Never have I been more convinced of the strategic value of our 3 ports and terminals and never had we had better cooperation and a closer working relationship with our neighbors and counterparties who want to access those properties. In short, we are in the strongest position we've ever been in with respect to these assets. They are strategically located to take advantage of the increasing flows of liquid hydrocarbons in North America and the macros driving those flows.

With that let me turn the call back to Alan.

--------------------------------------------------------------------------------

Alan John Andreini, Fortress Transportation and Infrastructure Investors LLC - IR [4]

--------------------------------------------------------------------------------

Thank you, Joe. Operator, you may now open the call to Q&A.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question comes from Justin Long with Stephens.

--------------------------------------------------------------------------------

Justin Trennon Long, Stephens Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

So I wanted to start with a question on the power plant now that we have an announcement on that front. And Joe, I think you mentioned you expect something to the tune of $200 million to $250 million of equity from selling that 49% stake. Can you talk about your plans for deploying that capital once it's received? Should we assume that all of this goes into aviation acquisitions or are there other investment opportunities we should consider?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [3]

--------------------------------------------------------------------------------

I would assume aviation investments. I think that's the most likely.

--------------------------------------------------------------------------------

Justin Trennon Long, Stephens Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

Okay. And along the lines of getting capital in the door, I did want to get your updated thoughts on CMQR and the offshore energy businesses. I know that they're both segments that you've contemplated as strategic alternatives in the past. Where do you kind of stand at this point in that thought process?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [5]

--------------------------------------------------------------------------------

Sure. So I think we are still evaluating alternatives. I think the CMQR are we likely to do something on this year. As I mentioned, we see this year, generating about $10 million of EBITDA, which I think is a good number and we'll make our decision on that, I think, shortly, but likely, I think, that we go forward with that this year. The offshore segment is also something I think we'll evaluate, but the Pride being in this period of conversion, I think once we get that sort of solidly in place in contracts, we have a number of parties that are interested, I think that will become also very likely, but that would -- I would say, more likely towards the end of the year, early next year.

--------------------------------------------------------------------------------

Justin Trennon Long, Stephens Inc., Research Division - MD [6]

--------------------------------------------------------------------------------

Okay, that's helpful. And then maybe lastly with the engine repair JV kind of on the horizon, about a year away, could you give some more color on the EBITDA contribution you expect from that JV as we get into 2020 and beyond?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [7]

--------------------------------------------------------------------------------

Sure. So there is 2 ways that we will make money off that. One is by managing our own engines and having a lower cost of a shop visit, we will have a lower basis in assets. So we will have more upside, either from a higher return or from the assets that ultimately we could sell. And as I mentioned, today we're achieving about $1 million per shop visit in savings from what we do today, which is a lot of module swaps and parts supplies. Adding the advanced engine repair next year, I think we'll increase that $1 million to really close to $2 million.

So it's a significant product that will have available, we'll have it on a proprietary basis. And so that we'll manage probably our own shop visits of 30 to 40 engines a year, so pretty significant contribution there. The other way is to offer that services to airlines and it's something that we've started to have conversations to explore really on a fee basis. And so we've estimated that if we could share the benefits of our product portfolio with airlines, we could generate potentially [$50 million to $200 million] of EBITDA with a 10% market share. So that's a little bit of a longer objective. But it's becoming closer to reality every month.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question comes from Devin Ryan with JMP Securities.

--------------------------------------------------------------------------------

Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [9]

--------------------------------------------------------------------------------

So, a couple of questions here, just on the potential for asset sales and maybe starting with Aviation. I know you guys are extending similar lease terms, and I believe looking to sell some leased assets and then recycle that capital, which would seem to [reduce] returns further. And so would love to just kind of get some perspective on what that would look like. Are these into ABS structures? How should we think about the relative returns there and maybe the sizing of that opportunity, would seem to make a lot of sense and be pretty compelling for you.

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [10]

--------------------------------------------------------------------------------

Sure. So, today there's substantial demand for aviation assets that have long-term contracted cash flows and that being like 5 to 6-year leases. And so we've created a number of those, I think very cost-effectively. We're good at buying off-lease assets or assets that need shop visits and managing the maintenance. And so we've taken a number of those assets, acquired at very good attractive prices and put long-term leases on them and we're thinking of capturing that value and then recycling the capital back and doing it all over again. So we could create maybe a much higher ROE out of this business by taking some of those -- really profits that we can manufacture.

And if you think about the magnitude of it, we appraise our fleet every year at the end of the year. We had about $1.1 billion of book value in an appraise for over $1.5 billion. So we've got about a $400 million embedded gain in what we own today. And I think we could transact at those appraised value numbers, or even higher, in today's market. So I think it makes sense for us to do that and we've got some irons already in the fire there. So I think it's something that you'll see more of this year and if it's successful, we'll keep doing it.

--------------------------------------------------------------------------------

Devin Patrick Ryan, JMP Securities LLC, Research Division - MD and Senior Research Analyst [11]

--------------------------------------------------------------------------------

Okay, terrific. That's great color. And then just somewhat interrelated. So if I look at Jefferson, the asset clearly has inflected a [decent ROE in my] opinion and has some pretty strong momentum behind it, but it doesn't feel like your stock, your public stock is really reflecting all that momentum [looking] forward potential. And it would seem that the value of that asset is also well above kind of where you have it marked at equity levels. So would you think about potentially selling a stake in that asset to a strategic buyer to take a mark there? Obviously, I'm assuming you could do that with a pretty big premium and that will get reflected into the public equity, but just trying to think about the potential for -- does it make sense to have a strategic partner there, given everything going on in that too. Would you think about it, because of the potential big implications on the public stock that you have?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [12]

--------------------------------------------------------------------------------

Yes, we actually -- we have thought about it, and maybe not just Jefferson, but the whole -- all 3 terminals as a possibility, because they're all very attractive assets from an infrastructure point of view, and they are all -- we all have very specific plans for developing each one of those. So we can put a very concrete set of numbers around the opportunity set. And I would say, in general, today, private market values of infrastructure assets are much higher than public market values. So it's something that we are thinking about.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

And our next question comes from Chris Wetherbee with Citi.

--------------------------------------------------------------------------------

Unidentified Analyst, [14]

--------------------------------------------------------------------------------

[James] on for Chris. Wanted to touch on the dividend. Looking forward, when do you think a possible increase could happen? With a quarter like this, this is probably the most logical question you could ask. You'd previously talked about 2x coverage. Just kind of want to get a sense of that?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [15]

--------------------------------------------------------------------------------

We think we will have probably 2x coverage around the second quarter of this year. And then as we've said, the dividend will reflect our policy of increasing payouts to maintain the 2x coverage.

--------------------------------------------------------------------------------

Unidentified Analyst, [16]

--------------------------------------------------------------------------------

Got it. And also wanted to touch on the power plant. Is there any potential upside there beyond what you've already contracted out and built out and like moving forward, what sort of magnitude would you attach to it, if it were there?.

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [17]

--------------------------------------------------------------------------------

Sure. So we do have upside. It's interesting that we've contracted for power, to sell the power at a fixed price, but we have the option to be able to substitute in higher-priced contracts and terminate the existing contracts. So we have our downside covered, and we have upside. And the way we would realize that is, if we bring a tenant to the property that's on our site, which is basically behind the meter, so they avoid transmission and distribution costs, we could charge roughly $45 a megawatt hour for power versus the $30 a megawatt hour we have contracts for today. So there is meaningful upside. If we were able to do 100 megawatts or 200 megawatts that way, it could be $15 million to $20 million of additional EBITDA. So it's a great structure, the logical parties to think about today for this would be data centers, that's the highest and best use of electricity in the world today. So there's tremendous growing demand. So now that we have the project committed in FID, we're going to go out and look very hard at bringing in tenants who would buy electricity. And the unique offering we have is that it's low-cost electricity and it's also fixed price. So we are not aware of anyone else really offering fixed-price electricity. So on an initial basis, it's been well received.

--------------------------------------------------------------------------------

Unidentified Analyst, [18]

--------------------------------------------------------------------------------

Given the sales cycle for that, should be -- if there -- a deal like that were to materialize, what year would it come about?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [19]

--------------------------------------------------------------------------------

I would say most likely -- you could have a contract this year, but you wouldn't have revenues probably until 2021.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

And our next question comes from Rob Salmon with Wolfe Research.

--------------------------------------------------------------------------------

Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [21]

--------------------------------------------------------------------------------

Joe, a quick question with regard to Jefferson. Obviously, there was a lot of volatility with regard to the spreads throughout the quarter. Could you give us a sense of how those volumes trended kind of during the first -- during the 3 months of the quarter, and kind of what you've seen to date in the first quarter? I think I heard you say you're expecting the volumes to be down slightly, but just a little bit more context in terms of how those volumes trend, it would be really helpful.

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [22]

--------------------------------------------------------------------------------

Sure. So you're right, there was -- I think we saw both extremes in the last few months of spreads, it went out to $40 a barrel of WCS versus WTI, and then it came into $10 a barrel. So we've got the bookends, $40 was too high and $10 was too low. So most -- if you look at the forward markets, it's $15 in Q2, and trending out to $20 by Q3, Q4, and $20 is kind of the sweet spot that most people think where it will settle, because rail -- you need to have enough spread to make rail work. The Alberta government is committing to rail, all the producers are committing to rail, it's going to be the reality for the next 3 to 5 years to move crude out of Canada. So we see that normalizing once this period of intervention in Q1 sort of ends, which is what the Alberta government said it was -- they're already walking it back already. So spreads have started to normalize out. So we've seen some producers delay moving by rail in Q1, but volumes for Q2 are looking very good. So I think we're going to have a huge impact to us. But it's -- but the rest of -- the outlook for the year, as I mentioned, for volumes, and I think importantly for term commitments, people are actually talking now about 3 to 5 year commitments. So that's a very significant positive for us.

--------------------------------------------------------------------------------

Robert Hudson Salmon, Wolfe Research, LLC - Research Analyst [23]

--------------------------------------------------------------------------------

Definitely. And then, I guess, as you guys are thinking about putting that capital to work with regard to the pipelines, are you also seeing those types of 3 to 5 year commitments, which kind of underpins that investment or is this more from an opportunity to increase the optionality of the investment by having the ability to capture kind of low-cost crude, regardless of what the spreads are?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [24]

--------------------------------------------------------------------------------

Yes, so the 800,000 barrels of storage we have coming on in April, we have a deal for 3 to 5 years on those tanks committed with one user. So that's good. I think that, that 3- to 5-year time horizon for those types of investments is consistent with what we expected and what we see in the market. With respect to the pipeline connectivity, once you are wired into some refinery, for example, and there's 2 of them right near us that we're going to connect to that are the largest in the North American market. So it couldn't be better. And once you're wired in, for instance, the cost, if you wanted to move refined products across the river, hypothetically, from one refinery into our terminal by barge, it's a $1 a barrel; by pipeline, it's $0.10. So once you have that you have a competitive advantage that is hardwired and you'll come up with a lot more opportunities to lengthen out the relationships.

So I see that absolutely happening. The second thing is that crude by rail from Canada is clearly a good market for 3 to 5 years and maybe longer, but we're also looking at other products, such as the waxy crude or crude that has its diluent removed that could be 10 to 15-year commitments. So we think that ultimately we have the best rail assets in the Gulf, by far, and we're going to take the opportunity in this period where the Canadian volumes are good, to fill in with other things that could be much longer in duration because waxy crude will never move in a pipeline. So it's always going to move by rail, those types of things.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

And our next question comes from the line of Ari Rosa with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [26]

--------------------------------------------------------------------------------

It's certainly an exciting story. Joe, I wanted to get your thoughts on the build-out target for storage capacity at Jefferson. That was helpful to hear kind of what the plan looks like for 2019. But as we've seen from some of the other infrastructure assets in the Gulf region, it seems like there is certainly demand to extend beyond what you laid out for 2019. So just wanted to get your thoughts on what a longer-term build-out target might look like at Jefferson? Just an updated view on that would be great. Thanks.

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [27]

--------------------------------------------------------------------------------

Sure. So as I mentioned, we should be at about 4 million barrels by the end of this year. The next project we're working on, really for 2020, is another 2 million barrels for the North terminal, so it'll bring us to 6. And we have pretty good visibility and line of sight on that and that will fill out the North terminal assets. And then beyond that, we're looking at a potential another 10 million barrels for the South terminal, which would also involve 2 new docks, which could handle Suezmax and that ties in really to the pipeline connectivity that I mentioned before. If we have that pipeline connectivity, pretty good chance we'll be able to contract up a fair amount of that. There's a couple of new [development]. I mean Exxon has announced they're bringing their pipeline into Beaumont from the Permian. So that's going to be a 1.5 million barrel a day pipe that we're hopeful will end up at our terminal. And then TransCanada has obviously got expansion plans as well to bring in a bigger pipe into Beaumont also.

So there's substantial volumes. And then Exxon expanding its refinery from 360,000 barrels a day to over 600,000 barrels a day will make it the largest refinery in North America. And that's gone FID. So that's committed. And the second largest refinery -- what is the largest refinery today is Motiva, which is 10 miles away. Exxon is less than a mile away. So, we'll have the 2 largest refineries in North America as our -- we'll be the closest we could be to them. So I'm pretty -- and their time horizons, when they make investments is 30 years. So I feel pretty good that we have the connectivity that they need, we have the land, we have the ability to offer something that's competitively advantaged.

--------------------------------------------------------------------------------

Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [28]

--------------------------------------------------------------------------------

That's really great color. So it sounds like you're not lacking for demand at all as you build out that storage. Maybe you could talk about what the expected returns look like as you go through that process.

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [29]

--------------------------------------------------------------------------------

Yes. I think previously we've talked about a million barrels of storage is typically $10 million to $15 million per annum EBITDA. So that's consistent with what the market is and what we've been seeing. And really storage is like -- it is the base fee you get. Then you get additional fees every time the product moves, or if it uses the dock or uses the pipe. So, the attractive part of this midstream business is you get your base covered. You have a lot of different ways to make money on the upside and then you also own the assets. So you have the optionality that people love to talk about when market dislocations happen, like when you had $40 a barrel differential that if you don't own the asset, you can't capitalize on that very effectively. If you do own the asset, you can make a lot of money very quickly. And I think that's really the reason why people value these terminals at 15 to 20x EBITDA. So it's not because they're thinking these things are stable -- wonderful. It's -- you've got your downside covered and you have some exceptional opportunities on the upside every once in a while.

--------------------------------------------------------------------------------

Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [30]

--------------------------------------------------------------------------------

Okay, great. And then shifting gears a bit, we've talked about this in the past, but obviously, there are a lot of capital needs across the table and certainly in the infrastructure portfolio. To what extent do you think an equity raise is on the table here? Is that just completely not something that you guys are considering right now or would it be -- I guess, would that be at the bottom of the list in terms of ways to raise capital? Obviously, we've talked about some of the joint ventures with the infrastructure assets being a priority, but is it safe to say that an equity raise is off the table?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [31]

--------------------------------------------------------------------------------

Well, I would say that our focus right now is on -- as I mentioned Repauno and what we've done at Long Ridge is maximizing the use of non-recourse debt to finance these capital expenditures. And when you have long-term contracts with investment grade counterparties that works really well. So that's our focus. And then additionally we've got some asset sales that I mentioned, the timing of which is always -- it's always harder to predict when you're going to actually sell something. But there's a number of different options we have planned. So those are our 2 priorities. We're always -- we always look at capital markets, though. And so we don't take anything off the table, but the focus is really on non-recourse debt and asset sales.

--------------------------------------------------------------------------------

Ariel Luis Rosa, BofA Merrill Lynch, Research Division - Associate [32]

--------------------------------------------------------------------------------

Got it. That makes sense. And then just last question from me, I've noticed that the duration of the contracts in the Aviation portfolio has extended a bit versus where it was maybe a year ago. Maybe you could talk about your thinking around that strategically and if you're at a place right now where you'd like to be, or if you see the duration of those contracts extending further out as that portfolio continues to get built out?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [33]

--------------------------------------------------------------------------------

Yes. Well, as I mentioned, the demand for assets is so strong right now that it's given us pretty good leverage. And we have increased the average duration of the engine portfolio. I think it went out from 11 months to 15 months in average and we've done more green time leases and we have airlines that they'll have call us practically begging for an engine. So it's a very good market environment. It's also -- push rates up too. So I think Pratt & Whitney just raised rates like 15% on leases. So we like that, that's a good pricing umbrella.

So we've got some leverage. As I said, I think that the outlook, if you look at the 757 and 767 market where we have a pretty big presence that -- those assets, there's no replacement for them and the freight market is taking up every -- Amazon is buying every 767 they can find. And there is tremendous demand from the passenger side, so that all feels great. And then you look at the A320 and the 737 market, and as I said, 60% of the engines haven't even been in the shop yet. So there's bow wave of shop visits coming, there's not enough shop capacity, not enough parts. It's all -- and it's hard to see what could cause that not to stay like that for the next 3 to 5 years. So I think it's pretty good. And we're obviously thankful for that and appreciative. It's a good macro, but it also structurally just feels like that's going to continue. If you look at any of the trade publications and people talking about maintenance and repair capacity, it's very tight and it's not likely to be solved anytime soon.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

And our next question comes from the line of Brandon Oglenski with Barclays.

--------------------------------------------------------------------------------

Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [35]

--------------------------------------------------------------------------------

I missed your prepared remarks, I really apologize if we're going to double-check ground here. But have you guys talked about where the level of throughput Jefferson -- Jefferson should be at this year? I mean should we be marking the $70 million of revenue this quarter, in the fourth quarter, as like the minimum going forward now?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [36]

--------------------------------------------------------------------------------

Well, we didn't talk specifically about guidance on that. I did mention the first quarter volumes on crude are going to be a little bit softer than they were in the fourth quarter, we had the spreads that were very attractive and then the [upper] intervention has caused some slowdown in crude by rail volumes in Q1, but it's looking very strong in [Q2] through Q4. And then we had -- in April, we had 800,000 barrels of storage. We have those tanks committed to one customer and 1.4 million at the end of the year. So it feels very good for the year, the exact timing of all that is -- we don't give quarterly guidance.

--------------------------------------------------------------------------------

Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [37]

--------------------------------------------------------------------------------

Sure. But I mean this has been pretty volatile, so I'm just trying to zero in on the model here. I mean, how much revenue have you contracted in Jefferson for 2019, maybe that's a better question?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [38]

--------------------------------------------------------------------------------

Well, we really look at the storage volume and pretty much all of our storage is fully contracted. So as you look at incremental additions of storage, then you should have revenue increase when those storage tanks are available. And as I mentioned, 800,000 barrels comes online in April and 1.4 million in December.

--------------------------------------------------------------------------------

Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [39]

--------------------------------------------------------------------------------

Okay. And then from an OpEx perspective, how should we expect expenses to scale with this, because we did see a step-up quite a bit this quarter too?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [40]

--------------------------------------------------------------------------------

Well, I mean, we did book some revenue in a different way. We booked tolling revenue for the most part, which you don't gross up revenues and expenses. When we arranged the full logistics chain and we moved crude from Canada, we then paid for all the transportation costs. So we end up with a much lower margin, but higher EBITDA business, but it's because you are grossing up both revenues and expenses. So the mix of that business is going to change for us. The economics of it are quite attractive. But it's going to change your, sort of, the margin computation.

--------------------------------------------------------------------------------

Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [41]

--------------------------------------------------------------------------------

Okay, fully understand, we can take that offline. And I guess just coming back to the other question about equity issuance. So can you walk us through in more detail what your actual liabilities are in 2019, like, sources and uses and what your cash cost is going to be?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [42]

--------------------------------------------------------------------------------

Well, the Aviation -- starting with Aviation, it's discretionary. It's a -- question -- we don't have liabilities, we have -- as I mentioned, we had $150 million of LOIs, which are going to close. So we'll fund those over the next 2 quarters. Then, in addition, what I said is that the -- what we're looking at in Repauno is financing that capital with non-recourse debt, based on contracts. So we would borrow at the Repauno level to fund most of that CapEx. At Long Ridge, we just announced the power plant deal, so that's fully funded, it's sort of in a box now. And then, Jefferson is really also being funded with debt capital at the Jefferson level, and it's primarily the storage tanks that we're investing in this year that I just mentioned.

--------------------------------------------------------------------------------

Brandon Robert Oglenski, Barclays Bank PLC, Research Division - VP & Senior Equity Analyst [43]

--------------------------------------------------------------------------------

So, I guess, not a significant call on an equity then?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [44]

--------------------------------------------------------------------------------

No, it's very manageable.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

And our last question comes from Robert Dodd with Raymond James.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

I mean, you actually covered the reverse question. My question is, it looks like you may end up with excess capital at the parent, right, because funding the infrastructure units -- at each individual unit with non-recourse, but then if you have 200 coming in from -- 200-plus coming in from the sale of the stake in Long Ridge, potentially the sale of CMQR and maybe shipping or offshore, but maybe that's next year. And then when we look at the Aviation business with the FAD run rate, the potential to recycle assets, I mean the -- even the Aviation business may not need much additional capital from the parent this year versus what it can generate itself.

The question, I guess, is, you did mention that for Long Ridge the -- coming back, we go to the Aviation business. So is the plan to accelerate the growth of the Aviation business or are there other also -- other opportunities you're looking at in infrastructure? Obviously, if you can arbitrage 4x development to 15x sale, that's a pretty good place to put capital, but obviously, it's a longer-term process as well. So can you talk us through the thoughts there?

--------------------------------------------------------------------------------

Joseph P. Adams, Fortress Transportation and Infrastructure Investors LLC - Chairman & CEO [47]

--------------------------------------------------------------------------------

Sure. So it's possible we are going to have excess capital by the end of the year. That wouldn't be a bad situation. But the 2 things that we look at in terms of -- always are investigating is, one is more Aviation investments, and so sometimes there are portfolio deals that come up that are attractive. So -- but we don't budget capital expenditures there, we only make them if the returns are good. So it's always possible that you could find a bigger opportunity in the market and Aviation is huge. As I mentioned, 22,000 CFM56-5B and 7B engines. And we are probably the most efficient best owner of those assets in the world. So that's huge. Secondly, we would look at investments that make our terminals more valuable. So if we can find an investment that is accretive, that would help accelerate development of Jefferson or Repauno, we're always interested in that. So that would be -- that's our principal sort of threshold or sort of filter for looking at things.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Thank you. And that does conclude today's question and answer session. I would now like to turn the call back to Mr. Alan Andreini for any further remarks.

--------------------------------------------------------------------------------

Alan John Andreini, Fortress Transportation and Infrastructure Investors LLC - IR [49]

--------------------------------------------------------------------------------

Thank you all for participating in today's conference call. We look forward to updating you after Q1.

--------------------------------------------------------------------------------

Operator [50]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.