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Fortress Transportation and Infrastructure Investors LLC Common Shares
Q3 2020 Earnings Conference Call
10/30/2020
spk07: Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Fortress Transportation and Infrastructure Investors LLC earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Mr. Alan Andrani. Thank you, sir. Please go ahead.
spk08: Thank you, operator. I would like to welcome you all to the Fortress Transportation Infrastructure Third Quarter 2020 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 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 FAD. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplements. 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 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 FCC. Now I would like to turn the call over to Joe.
spk02: Thank you, Alan. To start, I'm pleased to announce our 22nd dividend as a public company and our 37th consecutive dividend since inception. The dividend of 33 cents per share will be paid on November 30th based on the shareholder record date of November 16th. Now let's turn to the numbers. The key metrics for us are adjusted EBITDA and FAD, or funds available for distribution. Adjusted EBITDA for Q3 2020 was $58.6 million compared to Q2 2020 of $66.5 million and Q3 2019 of $112 million. On a normalized basis excluding the gains or losses from the sales, Q3 2020 adjusted EBITDA was $59.7 million compared to $65.7 million in Q2 2020 and $74.9 million in Q3 2019. FAB was $39.9 million in Q3 2020 versus $47.3 million in Q2 2020 and $120.7 million in Q3 2019. On a normalized basis excluding sale proceeds and non-recurring items, Q3 2020 FAD was 23.9 million compared to 38.2 million in Q2 2020 and 48.7 million in Q3 2019. During the third quarter, the 39.9 million FAD number was comprised of 74.5 million from our aviation leasing portfolio, negative 300,000 from our infrastructure business, and negative 34.3 million from corporate and other. Now let's turn to aviation. Q3 for aviation was a pretty good quarter. Financially, the cargo business continued to shine, but passenger recovery flattened out, so we came up a little short of our expectations. Passenger flight hours on our fleet have improved every month since April, and we expect that trend to continue as countries and economies continue to battle the virus and work towards an effective vaccine. As we expected, demand for engine leasing is picking up for all engine types as airlines dramatically cut optional maintenance restoration shop visits until available green time is consumed. We ended the quarter with approximately 60% engine utilization on our fleet and are engaging now with several airlines to set up leasing programs for 2021. Looking to 2021, Our total existing fleet of approximately $1.5 billion of invested capital should generate approximately $375 million of EBITDA per annum, or our target of 25%. We are also targeting new investments in CFM56 engines and related aircraft and have approximately 70 engines, 7-0 under LOI, totaling approximately $200 million of capital. we would expect that incremental investment to generate a higher EBITDA return of approximately 35% per annum, or $70 million in 2021, bringing total aviation EBITDA to approximately $450 million of EBITDA per annum. And with $120 million of cash at September 30th, and a $250 million undrawn revolver, we have ample liquidity to capitalize on these extremely attractive investment opportunities. We also last week entered into an exciting maintenance partnership with Lockheed Martin, which will provide FTI with numerous benefits and advantages in managing and growing our CFM 56 owned fleet and providing third-party services to airlines. while giving Lockheed Martin a steady supply of shop visits for their impressive Montreal facility. Financially, the benefits of this partnership to FTIE should materialize soon in early 2021. Firstly, we expect to save approximately $500,000 per shop visit in 2021, and with our own fleet in excess of 200 engines or 40 shop visits per annum, represents a 20 million savings in 2021 secondly by setting up the module factory we can optimize the part out of engines and our goal is to monetize the equivalent of 20 engines for a gain of approximately 1 million per engine or an additional 20 million dollars in 2021 lastly we plan to establish cfm 56 programs with airlines many of which we've already begun discussions and negotiations with cash cash conservation programs for airlines at an all-time high and available spares with green time running down our timing is optimal our goal for 2021 is to enter into programs with two to three airlines covering 250 engines or 50 annual shop visits with our current set of practices and contracts We are targeting a profit of $1 million per shop visit for FTIE, with a savings in excess of that for the airline, while also providing the airline with significantly quicker turn times due to our new innovative module factory approach. So in total, our goal is to generate an incremental $100 million per annum starting in 2021. Also very exciting, is our advanced engine repair joint venture. As a reminder, if and when we have approval for all five parts, the savings to us will be over $2 million per shop visit and will give us proprietary position to perform a $6 million average shop visit for approximately $2.5 million. And the first of these products is in the final stage and should be commercially available very soon. Now turning to Jefferson and infrastructure. The big news at Jefferson continues to be the significant progress made on the three major pipeline connection projects, both from a construction management perspective and from negotiations around commercial deals with Motiva, owned by Saudi Aramco, Exxon, and other creditworthy third parties. As a reminder, these three major projects, which are now two to three months from completion and operation, will connect or hardwire the Jefferson Terminal with the two largest refineries in North America. As such, we have been and are actively engaged with both refineries regarding numerous opportunities to receive, blend, store, and export a wide variety of crudes and refined products. And as the projects get closer to actual operation, the number of options and combinations keep expanding. And we are also looking at adding additional pipeline connections to further solidify our market position and competitive advantages. In Q3, Jefferson was able to post its third consecutive quarter with positive EBITDA of $4.3 million, up from $3 million in Q2. And the improvement was driven by rationalization of costs during the pandemic-driven downturn, increased refined product volumes, and 100% utilization of our storage. Of note, this was achieved in spite of having no crude by rail moves into the terminal in Q3 due to compression in WCS versus WTI spreads and less refinery demand. We are now starting to see increased demand with spreads widening and have trains scheduled again for waxy crude from Utah in Q4 of this year. And the Canadian market is showing activity again, both near term and long term. At least one diluent recovery unit, or DRU project, is moving forward with planned movements to the Gulf Coast in the second half of 2021, which we are well positioned to handle. DRUs will provide a steady, regular flow of heavy crude by rail, which Jefferson is fully capable today of receiving, storing, blending, and shipping. So in all, not a bad result in Q3 in an extremely challenging demand environment with major advances in connectivity and optionality just about here. And we can't wait for 2021. Turning to Rapano, construction of our phase one NGL natural gas liquids train to ship loading, trans loading operation is now complete. The work took longer than originally scheduled due to COVID related issues. But with construction complete, we are in the process of testing and commissioning the system. And as we communicated last quarter, our 186,000 barrel cavern has been successfully pressure tested, confirming our ability to store propane in it. This is important to us because of the size of the propane market is much larger than the butane market. We are currently in negotiations with both producers and off takers for propane delivery beginning in early Q2, 2021. The negotiations are going well, and we expect to have firm commitments either late Q4 of 2020 or early Q1 of 2021. We expect to be shipping our first cargoes of propane early Q2 of 2021. As to other opportunities at Rapano, we continue discussions with the wind farm component manufacturer and alternatively biofuel manufacturers. And finally, the road construction of the bypass into Rapano is progressing well and is expected to be completed in Q2 of 2021. The bottom line on this is COVID-19 has caused some additional challenges at Rapano, but as to the commercial discussions, we are seeing parties re-engaging and the discussions are going well. On Longridge, Q3 was a good quarter for our frac sand business, particularly when considering the industry-wide slowdown in natural gas drilling activity. We transloaded over 200,000 tons of frac sand, which was in line with budget. And for the first three quarters of 2020, we transloaded over 700,000 tons of frac sand, which is approximately 14% ahead of budget. As a result of Longridge's strategic location in the core of the Marcellus and Utica shale regions, one of our largest customers has indicated interest in extending our existing contract for a five-year term. And in addition, in the third quarter, Longridge signed a second two-year contract with a commodities trading company to transload and store road salt. The power plant construction continues to be on budget and is tracking to an earlier completion date than November 2021, which is guaranteed by our construction firm. Furthermore, we continue to see a high level of interest from power-intensive industries looking to site new facilities at Longridge. In addition, we have numerous ongoing discussions with data centers whose interest is driven in part by our recently announced initiative with GE and New Fortress Energy's Zero Division to blend carbon-free hydrogen as fuel for our power plant as early as next year. We're very excited about this initiative as Longridge will be the first purpose-built hydrogen-burning power plant in the United States and worldwide to blend hydrogen in a GE H-class gas turbine. In conclusion, like most companies, we continue to see pressure on our businesses in Q3. Decision times have been moved to the right, for sure, but we continue to make good progress on all of our long-term plans. We looked for two years to find the right MRO partner, and in Lockheed Martin, we believe we have found that partner. Together, we're going to be able to change the landscape of the CFM56-5B-7B maintenance market for the next 20 years. This relationship, combined with our PMA initiative, will put us in position of having offerings to the airline industry which no one will be able to match. This has taken years of hard work, focus, and dedication from a lot of talented people, but the vision that we had and initiated four years ago is close to becoming reality. As to Long Ridge, the hydrogen initiative that we announced with GE and the Zero Division of New Fortress Energy is already being felt in the market. The conversations that we are having with major data center users have accelerated and are more serious. The financial impact to our remaining 50% interest in Long Ridge will be meaningful. Of equal importance in our mind is the fact that this first of its kind initiative in hydrogen power will be an important step in the world's goal of zero emissions. For sure, the financial gains from this initiative are not lost, but of equal importance is the fact that we are now playing an important role in the aspirational goal of zero worldwide carbon emissions. and we are confident that our experience with this project will lead us to more carbon-free power project investments. For Jefferson, our goal has been to build a core business that generates a fair return but opens up, once that infrastructure is in place, multiple additional high-margin expansion opportunities. Right now, we are engaged with several major projects with our neighbors, which could and will lead to such an outcome. As I look back on Q3 and compare it to all our quarters since we went public, I think we remember it as one of our most important from a strategic initiative standpoint. From the MRO deal with Lockheed Martin to the PMA deal hopefully days away to the hydrogen initiative at Longridge and to the aviation growth opportunity I mentioned earlier, FTIE will come out the other side of this pandemic a better, stronger company. With that, let me turn the call back to Alan.
spk08: Hi, Joe. Operator, you may now open the call to Q&A.
spk07: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Your first question comes from the line of Juliano Bologna of Compass Point.
spk05: Good morning, and thank you for taking my questions. I think I guess I'm starting on two kind of related topics here. When we think about the Lockheed transaction and the roughly $500,000 per shop of savings, is that included in the $375 million that you were discussing for fiscal 21 for aviation?
spk02: No. No, that was meant to be the incremental total of the three parts of the Lockheed totaled $100 million, and that's incremental to the $375 million.
spk05: That makes a lot of sense. So I think when I think about the kind of accretion discussion that you brought up, that would all flow through the aviation segment and that would be accretive to the guidance of kind of 375 and then the 450 if we included the additional engines that you're planning on purchasing?
spk00: Yes.
spk05: That is great. Then... Taking a little bit of stuff further, just thinking about it from a timing perspective for a few different initiatives and central catalysts out there, you mentioned hopefully the PMA approval is days away. If you could just get a quick update around where you are in the process. I think you have the application in for the first part and you're awaiting approval in the first part. And I would be curious around the second part if the application is in and if you have a sense of timing for the second part.
spk02: That's correct. The first part, there's two parts that we started three years ago are essentially, you know, fully engineered, built, and developed. The first part of the application is complete. And as I mentioned, we're waiting, and the FAA has been with us all the way along the way, so we don't anticipate, you know, significant delays from here. So that we're very hopeful will be days away. The second part will be finalized in the fourth quarter. The final application should be made by the end of this year. And same thing as the FAA has been involved all the way along the way, so we don't anticipate major delays beyond that. So those are the first two. And then, as you remember, we started work on three additional parts last year. So that we would expect to be done in 2022.
spk05: That makes a lot of sense. And then kind of a little bit of a different topic. When you think about LREG and the remaining 50.1% interest, obviously as you get closer to completing that, you know, the incentive to potentially sell that stake probably increases dramatically. And so what I was kind of curious on that side was, you know, how you think about that asset from a monetization perspective and, you know, Obviously, we can think about completed projects and having much higher multiples, obviously, than the first early 49.9% stake that was sold. But just thinking about monetization opportunities and what you might potentially target there. Obviously, Jefferson is a little bit of a different situation because you probably need to have a little bit more progress before that becomes saleable in part. But just thinking about monetizations of assets on the infrastructure side.
spk02: You're right. I mean, that's definitely would be something we would look at and think about. It should be operational in Q3 of next year, a year from now or even earlier than a year from now. And at that point, that's when you have the maximum amount of contracted revenue. So there are a lot of people that we've talked to over the prior years that expressed interest, but they only wanted to invest when something was up and running and operating, not under construction. So The market widens out, and I also think, as I mentioned, that if we have a carbon-free path to power generation through hydrogen, that's also going to be significantly higher value than a carbon power plant, of which there are many. So I think the combination of those two things would make it something that we will consider earlier than probably the other two that you mentioned.
spk05: That makes a lot of sense. I appreciate the time, and I will jump back in the queue. Thank you.
spk02: Thanks.
spk07: Your next question comes from Josh Sullivan of the Benchmark.
spk03: Good morning. Good morning. Just with regard to the tightness in the aerospace engine market that you're looking at over the next couple of quarters, what is your sense of the overall industry green time remaining? Are there any metrics that give you confidence that we're, you know, other than air traffic, that we're chewing into that, you know, our shop visit schedules tightening, our other prices on parts in the secondary market? Just curious what gives you confidence that, you know, this dynamic is playing out.
spk02: Well, we look at all the data, and, you know, we have the same information. We had previously indicated, you know, our numbers would indicate by Q2 of 2021, you'd be out of spare engine capacity. That's if That's if engines can be moved efficiently from one airline to another, but they can't. And so I think the most recent indicator that we have is real customers with airlines or conversations with airlines that are happening now where airlines are looking at their own planning and seeing that they're going to need engines maybe earlier than that. And that's why we're having conversations now regarding programs that would start in 2021 because I think they're quickly going to see that they may not have as much available capacity as they would like. So I think they're looking at starting programs now because there is a lead time to getting these things in position. So that's why I think our timing with the Lockheed Martin program is optimal because We've started moving modules and engines into that facility now and can begin supplying engines to airlines pretty quickly in 2021. We feel like the timing of that as well as the using up of green time is really optimal. Airlines are looking, as you know, to maximize cash and save cash. Going to them with a program to say that we can supply you with engines without you having to invest in older engines is really attractive. We're hopeful, as I mentioned. Our goal is to sign up 250 engines, which isn't really that much. We have over 20,000 engines in the world. It's not that much to get, and the contribution would be meaningful also. position us to be a service provider as well as a leasing provider, which I think is quite valuable.
spk03: Got it. I mean, do you see other partnerships with other parts or distribution, you know, coming into play here as you kind of expand the capabilities there at the Lockheed MRO relationship?
spk02: Yes. There's one more part I think that is important. The used serviceable material is an important component, and that's something that we're working on, which would give us really a comprehensive solution across the whole engine. So that's something that given our, you know, we know all the players, and we've had, you know, meaningful discussions. We have quite an, we're an attractive partner because we have 200 engines, and we're going to be, you know, adding to that. So I think that that is something that we can, we can, we've, done a lot of work on, and I think it's something that is sort of the last piece of the puzzle.
spk03: Got it. And then just one on the sale of the stack market. Has it remained active? Do you think we'll see another wave of interest just as Global Airlines kind of settle into the new reality here?
spk02: Yes. I think it's going to be a very tough winter for airlines. So cash is you know, they're doing everything they can to survive and CLE specs is a source of cash that they're going to tap. I think that earlier this summer, there was a, you know, a lot of activity. Some of the deals got done and then some of the deals, I think you've just been pushed back because you've got a lot of government money coming into the airlines. And when you get government money coming into the airlines, then everything takes longer because you have another party to negotiate and look at everything. So, But I think that those deals are not dead, and there's going to be an active sale-leaseback market, I think, for at least the next year. Thank you for the time. Yes.
spk07: Your next question comes from Chris Weatherby of Citi.
spk11: Thanks, guys. I wanted to touch on the aviation EBITDA outlook for next year. If you could unpack that a little bit and walk through what exactly is included in terms of assumptions around that. I know you talked about 70 incremental engines going into that as well, but Can you talk a little bit about sort of, you know, underlying market conditions that support that? And then, obviously, the last question around sale-leasebacks kind of, if anything, is included in that. You know, I just want to kind of make sure I understand what the walk-up is from where we are today to what is that 450 and kind of what you need to see happen to make it at that number.
spk02: Yes. So if you look at our current fleet, it's about $1.5 billion. Yes. we should do probably about, you know, $290, $300 million off of EBITDA this year, which is below our target. And I mentioned the impact of COVID on that, you know, is sort of right in that range of, you know, $50 to $60 million, you know, impact this year. So we see that returning to more normal. We actually had an EBITDA pre-COVID that was going up in the high 20, 28, 29, 30%, but we're saying, okay, next year we think the airlines that we've backed are survivors and we will see a return to a 25% EBITDA margin based on analysis of our portfolio. And we do have a good chunk of assets in the freight market, which is doing really well and will continue to do well. And we've added customers like Air France and a couple of other sovereign airlines. So We feel pretty good about 25% on $1.5 billion. So that's the $375 million. Then turning to the incremental investment, we have $200 million of capital under LOI to invest in about 70 engines, all CFM56 engines. So that's what we've been talking about, what we've been targeting. And the attractive... The pricing on it is very attractive because there are a few competitors with capital that are looking to buy assets right now, so we're able to get very good pricing. It's about $3 million per engine on average. We have some engines that we're buying actually as cheap as $1 million, so there's a bit of a range, but on $3 million of average for a CFM56, we believe we will generate with with in our assumption on utilization for that is approximately 75 percent and I think that could end up yeah I think that's a reasonable assumption it could be there could be some upside there because I think as I mentioned there's there's likely to be a tight market but 75 percent utilization generates a 35 percent EBITDA margin on that 200 million so that's an incremental 70 million so if you take $375 and add $70 million, you're at the $450 number or approximately $450 per annum EBITDA for us for 2021. That's without adding any incremental benefits from the Lockheed Martin partnership, which I mentioned, which we believe will approximate $100 million. Okay.
spk11: And there's nothing incremental from a national carrier sale lease back or anything like that involved as well?
spk02: No. I think we'll see other good investment opportunities. I really do. I think the market is stressed, as you know, and it's likely to present other opportunities, but we're not factoring that in at this point.
spk11: Okay. That's very helpful. I appreciate that. I guess I just wanted to touch base on Jefferson to try to understand maybe the trajectory of that business coming out. Obviously, I think as you mentioned, crude by rail opportunities have kind of decelerated and slowed pretty meaningfully. Can you talk about sort of pipeline connections and maybe other potential opportunities at Jefferson as we roll into 2021?
spk02: Yes. So the three projects, you know, will provide meaningful connectivity and upside for us. And we'll have six pipes. that should be completed in December that will connect us to the Exxon refinery. And initially, you know, the plan is really we've only got one of those that's being utilized today. So that would be the refined products to Mexico. So we have obviously lots of conversations going about utilizing those other pipes, and that's what I mentioned. The opportunities and the – there's a – definite effect you have when you actually are building something and are about to complete it, you get a much more serious focus and conversation than when you're in the early stages of planning things. So we're hopeful that there'll be a lot higher utilization on those. The timing of that is difficult to predict and definitely the slowdown in demand that the refineries are seeing, the demand destruction has been pretty significant. So The timing is probably the challenge, but once the pipes are done, the leverage is significant. That's one part of it. The other parts are the crude part where we have an inbound crude pipeline connection from Cushing, so that will connect our refinery for crude, which is very important for us to be able to blend because as you bring crude by rail in, you need to blend it with another type of crude. So the payline connection from Cushing will give us a very competitive and cheap blend stock for crude by rail. Then crude by rail, as I mentioned, is showing signs of activity. Again, we've got trains booked from Utah into the terminal for Motiva and Motiva's is the other part of the outbound is the other pipeline connection. So we're building the pipe from Jefferson to Motiva so we can blend, bring in crew by rail blend and then ship by pipe. So it's very efficient supply chain. And then lastly, as I mentioned, I alluded to, we've got other pipeline connections. that the more options you give these refineries, the more interested they become. And so we now will have multiple connections, but if we can add additional options, then we provide a really high-value service because they can switch sources as prices move around. So we're expecting significant upside opportunity, again, on the crude side as well as on the refined product side. It's just, again, the timing of predicting that is hard. But once the pipes are there, we're going to use them.
spk11: Yeah, okay. That's great detail. I appreciate the time. Thank you.
spk07: Your next question comes from Justin Long of Stevens.
spk01: Thanks, and good morning. Just wanted to circle back on aviation and some of the 2021 commentary. Joe, I think you said on the LOIs that you're expecting to close, the assumption is that utilization will be 75%. I wanted to clarify, is your assumption that utilization will be at a similar level for the existing assets when you gave that guidance for 2021? And is there anything you can share on the trend in utilization in October?
spk02: Yes. Yes, the assumption is the same for the existing portfolio, approximately 75%. And we're seeing very high utilization on the freighter. And as I mentioned, we exited the quarter in September with 60% overall utilization on the existing engine portfolio. So it's been coming up every quarter. The average for the quarter is in the low 40s. So it started out lower, and it's been building. And as I mentioned, part of the reason that Q3 was challenging is July and August, it didn't pick up until later in the quarter, closer to September. So we're expecting that that trend in, you know, we have engines that we delivered. It also took longer to get engines, you know, delivered during Q3 given the travel restrictions and just getting things moved around. But in the fourth quarter, we're expecting, you know, that 60% to be trending, staying there or going up. And then, as I mentioned, we expect as we deploy that, the new engines and we see an increased tightening market, we expect that 2021 will be at 75%.
spk01: Okay. In October, have you seen that 60% exit rate hold steady, or has there been any improvement?
spk02: I would say steady.
spk01: Okay. And then, you know, this quarter you mentioned that you harvested some non-core assets in aviation. I was curious, you know, if that's something we should expect to continue going forward or if this was just something isolated in the third quarter. And maybe you could provide an update on how your assets in aviation break down by customer today.
spk02: Sure. So the... We did harvest some engines, and mostly it was CF680 and Pratt 4000s, which are engines that fly on 747s primarily or 767s in the freighter market. And the reason we sold some of those is rather than invest, most of those were unserviceable engines, so you either have to invest in another shop visit or you can sell them into the part market. The part market is pretty strong given the demand for freight flying. So from an investment point of view, it made more sense for us to sell them into the part-out market than it did to put them through a full restoration and invest for another four or five-year cycle. So it was really just sort of a timing issue in terms of taking a better bid from the parts market than making an investment and putting them in for another four or five-year shop visit, which may or may not be the outlook for investors. 12 to 24 months for those engines is pretty good. The outlook for 60 months is a little less hard. It's a little cloudier. In terms of the portfolio, we have about 20% of the portfolio in the freighter market, and that is doing pretty well. So obviously that's a bigger portion of our revenues. We have about 60% in the narrow body market, which is A320s and 737s and CFM engines, and about 20% in 757 and 76 market, which is underpinned. Most of those that we own in that 75 and 76 are not cargo planes today, but there's a strong bid from cargo companies buying those planes to convert them to cargo. So total portfolio is similar to what it was in Q3. I'd say on the customer concentration, now our largest customer is Air France, and we've added a couple of state-owned sovereign credits. So I'd say there's been a little bit of a shift towards that way on the narrowbody side, and there's another deal that, we're fairly far along on that's close that would even push that number even higher. So I think that's the trend line is we'll have more state-owned sovereign credits in the narrow body side.
spk01: Okay. Very helpful. I appreciate the time.
spk02: Thanks.
spk07: Our next question comes from Devin Ryan of JMP Securities.
spk00: Hey, good morning, Joe. Just really one question for me, and I want to come back to aviation here. One element of the combination of a Lockheed program that's at least very interesting to us is the vertical integration of the business. I think that gives the platform a number of competitive advantages over other lessors. I think it could also potentially change the valuation framework relative to others over time. So I'm curious – whether you guys would consider separating aviation from the infrastructure business, especially if you're getting to the types of FAD numbers next year that are projected, just given that that's quite a level of scale in the industry. And so just thinking about the potential to separate the platforms to clean up the corporate structure and obviously simplify the story, and whether you could actually do this based on the current debt structure or if it's even something you're open to exploring?
spk02: Yes, we've talked about that before, and we're open to looking at it. I think we expressed the goal that we would like, if we did separate them, to have each aviation and infrastructure have a billion-dollar market cap connected to them, so there's enough liquidity in both. And so that's one goal, and I think it is something that we could manage with the debt structure, and we've got ideas, but We don't have a specific timeline or action plan at this moment. I think it's something, though, that we believe longer term would make a lot of sense, and it's something that we're going to continue to think about and try to figure out the best timing.
spk11: Okay, great. Thank you.
spk02: Thanks.
spk07: Your next question comes from David Zazula of Barclays.
spk09: Thanks for taking my question. Just on the aviation side, I guess my question is, given the harvesting of engines you did this quarter and the Air France deal you did last quarter, has that given you a shift in your geographic end markets? And what do you feel are kind of the benefits and risks of having your current shift in geographic end markets from here?
spk02: Well, we've I mean, we've shifted slightly to Europe with Air France adding, but we still have a fairly diversified between Asia, Europe, and U.S., U.S. being the smallest, North America being the smallest. But the assets are very, very fungible, so I think that's the beauty of aviation is you can move them around. Right now, the the global market is moving pretty much in lockstep. There are times where certain regions do better than others and assets move in that direction. But right now, it's not extremely significant in terms of being in one market versus another. So I think that we're happy with the mix we have. And as I said, I think we will see a bigger shift to state-owned markets or sovereign airlines just because those are the airlines that are getting the funding from governments, and that's where the assets are going to be the most stable and the most solid. So I think we're targeting those carriers specifically, as I'm sure everybody would say would make sense. So we'll see a shift to sovereign credits as opposed to any region in particular. Thanks.
spk09: And then, you know, on the maintenance side, you know, as the FAA approval, you know, timeline appears to be stepping up, have you gotten orders in? And, you know, if so, how quickly could you ramp up to start processing your orders?
spk02: Thanks. Yeah, the production is in the works. So there's a pretty quick inventory availability. And there are orders for parts already. So once the part is approved, it can be made very quickly, you know, and we've indicated our interest in orders as well, given our orders for our owned aircraft, our owned engines for next year. So there's not a big lag. This has been, you know, it's been a long process of getting approval, so there's been plenty of time to plan production.
spk09: Great. Thanks, Joe.
spk02: Thanks.
spk07: Your next question comes from Ari Rosa of Bank of America.
spk12: Hey, good morning, Joe. So, you know, it sounds like you have a lot of confidence in the $450 million EBITDA figure for next year. Similar to kind of Chris's question, to what extent is that kind of contingent on a recovery in, you know, in passenger traffic or something of that sort and kind of in line with that? Do you see this quarter as kind of being a trough for what we should be able to expect in terms of EBITDA and FAD going forward, because obviously you're still covering the dividend, which is great. But I think, you know, as you mentioned in your prepared remarks, this was probably a little bit softer than what some of us were looking for. So in terms of looking at 2021, just maybe if you could give some parameters around how much confidence you have in that 450 number and what that implies for kind of FAD across the business.
spk02: Well, you know, obviously we feel pretty good about it, but obviously, you know, COVID is still out there and you see Europe and Germany and France, you know, taking steps to shut down again. On the other hand, you have countries in Asia where there have been no infections in Taiwan, you know, And China's back to pre-COVID flying levels. So it's quite varied around the world. But people are figuring out how to manage it. And people are flying. The U.S. had a million passengers in September. So I think people are getting there without a vaccine. Obviously, many airlines are pushing, hoping for vaccine and therapeutics and And the sounds around that from people that know better than I know is that people are pretty optimistic that there'll be something available, you know, pretty soon. Now, how quickly that, you know, is effective or not. And then you also see airlines starting to do rapid testing, you know, British Airways flying to London, you can get a rapid test now three days a week for everybody on the plane. So the airlines are working and countries are trying to figure out people, you know, want to be, you know, back, you know, flying and traveling. So It's not without some risk that there is a snapback, but it feels like it's going to keep moving up and getting better. And what happened, I think, a little bit in the third quarter is it just took longer. People were not rushing to get there as quickly as it seemed like they were. So the risk, I think, is more on the timing side, but we feel pretty good that something People are getting better and people are improving how they manage, and there's a lot of good signs out there, although this week it's hard to feel great about it, but it does feel like people will get a handle on it, and 2021 should be much better, we hope.
spk12: Got it. Understood. And then just, you know, in terms of the MRO deal, you know, Lockheed is obviously very reputable in this space. Maybe you could talk a little bit about kind of the nature of the discussions that you had with them. And, you know, if I could ask you to speculate, why do you think from their perspective they chose FTI as a partner?
spk02: Well, we've been talking about this for two years. We've been looking and trying to, you know, find the right partner for us, for our business. And What we were looking for is someone who valued our flow of business. We have, as I mentioned, 200 engines, which is 40 shop visits a year already. They see and we see the opportunity that that's going to grow. That's what's very attractive. That's what we brought to the table. Lots of people were interested. We had conversations all over the world with many, many different parties. But Lockheed is very reputable. As you point out, they have a fantastic facility. It's probably the best facility of any of them that we saw with 300 shop visits a year. It's the old Air Canada engine shop. And their timing is they don't have a lot of flow there. And then post-COVID, the outlook has got even further pushed out. So I think that's what they liked. What we liked, we wanted to get, um, the ability to, to have, to be an important customer and to create this module factory is something we've also been talking about before, because if you can have modules, uh, available, you can avoid, um, a full restoration shop visit, uh, pre COVID was taking in some cases, you know, nine months. So if you actually only need to work on the low pressure turbine and you need one, you need a module, you can pull that off and you can have an engine, out within 30 days, so you can dramatically reduce the time that an engine needs to be idle. So that was not easy for us to be able to get from a lot of different MROs. They just wouldn't accommodate that, or they didn't have the space and the availability. So that was a big part of the discussion, and they did have the room, they have the capability, and they're actually very excited about, that capability and what it will do for their business and ability to attract other business. And we did that deal without having to invest in their shop. They weren't looking for us to buy an interest. Some of the other deals we were looking at, we would have had to invest capital. We would have had to buy tooling. We would have had to buy an equity interest. And we were able to avoid all that. So I think that what we got was everything we needed without having to, you know, to really, you know, do something that we didn't want to do.
spk12: Got it. That's a great caller, Joe. Thanks for the time. Thanks.
spk07: Your next question comes from the line of Frank Galante of Stifle.
spk10: Yeah, hi, Joe. Thanks for taking the question. I wanted to follow up, actually, on the last question on the Lockheed partnership. So I get that you guys are able to bring in volume to the MRO business, which is in need of shop visits. But why isn't Lockheed doing this directly? You guys had said that you're targeting 250 engines, 50 visits a year, and you're able to save a million dollars, or I guess more than a million dollars on the proprietary, or I guess on the module part. but it feels like Lockheed's giving up too much. Maybe I'm reading into that too much. Are they that desperate for shop visits?
spk02: Well, I think it is a difficult time for an MRO, so I wouldn't characterize them as desperate, but I do think it helps them at a critical time. But if you look at the maintenance MRO business, we've talked to a lot of these airlines that Very few of them are owners of engines. And so in order to create a module factory, you need inventory and you need to own engines and you have to have a critical mass. And I'm not saying the MRO shops couldn't do it, but they don't do it. Very few go to their board and say, I want to be in the engine leasing business and I want to go invest several hundred million dollars and build a business when they have no history or capability or leasing team or whatever. It's a vertical integration. So we came at it and we do a fair amount of business with other MRO shops as a private label provider of engines. So an MRO will go out and pitch their shop visit services to an airline and the airline says, can you get me an engine? while my engine is in the shop. And a lot of the times the MROs will come to us and say, do you have an engine for us? And so we're like a private label leasing provider of spares. So we've been and we serve the aftermarket. So we're not the OEM. So you also have to find an MRO who is aftermarket-oriented as opposed to OEM-oriented, and those further limit the number of people that are in that market. So it was a long hunt, but it worked out great for us timing-wise, and I do think it's a good deal for Lockheed as well because there's going to be a lot of flow, and this hopefully gets them started on bringing other customers and other business in and If we start doing PMA and we develop a program with an airline, that could end up flowing to them as well. So I think they see upside as, in addition, this is not just a deal they had to do.
spk10: OK. That's actually a really great color. Appreciate that. So effectively, you guys are bringing to bear CapEx in the form of engines. And you're sort of leasing out space. So how much is that going to cost you guys, and then how much are the minimum volumes, and is there any economic share with Lockheed in this deal?
spk02: We don't rent space, but we do have some minimum volume commitments under the seven-year, and I would characterize that as modest and very manageable from our point of view, but But that's something that was very important to them, and we are committed to that. But we don't pay rent, so we're just going to be using the shop for shop visits, and we'll also have the ability to store modules and keep modules there. So that's very attractive in terms of that. If you think about the industry, airlines don't have capital. Maintenance shops don't have capital. And we are one of the few places that you actually are willing to invest in engines. So that gives us a huge boost to the business right now that we didn't anticipate or didn't see a year ago. The timing on that, if we can go to airlines and partner and say we can provide all of your needs and do it for a lower cost and save you capital, that's a pretty compelling proposition that I think is going to be very significant for us going forward.
spk10: Yeah, it sounds like a great deal. Just one last question for me. Just kind of following up on the 75% utilization you guys expect for your engines in 2021, most of the question is around pricing power. Are you having to reduce pricing in that scenario? where utilization kind of bounces back next year?
spk02: No, the engine leasing business has never been really a price-sensitive business from that point of view. The prices tend to be set by the OEMs, and they set prices very high because they're always charging a lot for their parts and raising prices, so we fall under that umbrella. And it's usually when someone needs an engine, they don't go out with an RFP. They actually call a handful of people and they get an engine and it's typically not the CFO who's negotiating with you. It's somebody that has to get an engine because they need to fly a plane in the maintenance side. So it's very difficult to move engines by cutting the price is what I'm saying. It's much more of a demand driven need-based decision, and it's not really, we haven't seen pressure on rents. And maintenance reserves also keep going up every year because the OEMs keep raising prices.
spk10: Okay. Great. Go ahead. Thanks so much. Thanks.
spk07: Your next question comes from Randy Benner of B. Riley.
spk13: Hey, good morning. So shifting back away from aviation and Appreciate the comments on Jefferson Terminal and the pipes coming to completion in December. Yeah, I apologize if I missed it, but did you give any kind of quantification of financial impact for that, you know, looking longer term? I know it's not as defined as everything we talked about in aviation, but some parameters there and then possibly also on the Longridge Data Center siting opportunity. Just kind of maybe digging into timing and the longer-term financial impact, if you could.
spk02: Yes. We've said that Jefferson, when the pipelines are built and operating, will be at approximately an $80 million EBITDA run rate. What is a little harder, given the COVID delays for the refineries, is predicting the timing exactly of that. but we will have the pipes done in the next two to three months, and we're hopeful that we'll have commercial deals in place shortly thereafter to get us to that number or even higher. In terms of Long Ridge, we have engaged a number of data centers and talked to them about providing them the site and the power, and so we have multiple proposals out And I think the hydrogen play is one that's actually very helpful because it's not just any data site at that point. It's a data center with a hydrogen story or hydrogen play, which is very helpful. So we turn on the power plant in the third quarter of next year. So we're hopeful that before we turn it on, we'll have actually signed for a tenant and a construction project by then and hopefully you know early this early in 2021 is is our goal okay but at this point there's no there's no numbers you broad broad numbers you can give as you're still in negotiations right we did say that if we're able to sign up I mean because we sign up a tenant on our site we will generate closer to sort of mid-40s in terms of dollars per megawatt hour versus high 20s today, so significantly higher power revenue. And if we were able to contract half of the power output, that the EBITDA for the total power plant would increase from $120 million up to $140 to $150 million. And obviously, if there's a hydrogen play or component to that, we think that the multiple, the valuation multiple, would also be much higher.
spk13: Perfect. Thank you. Thanks.
spk07: Your next question comes from Rob Salmon of Wolf Research.
spk14: Hey, good morning, Joan. Thanks for taking the question. As we think about the utilization outlook for 2021 of 75, can you help us bridge kind of the improvement from roughly 60% in September up to that 75? Is it where we have kind of a better run rate exiting September than the overall average? Is this related to timing of some recent deals, or is there something related to a vaccine that that's embedded in your forecasting?
spk02: Sure. So we exited the quarter at about a 60% average. And so it's been steadily trending up. If you look at every month since April, it's been trending up. And we also have a number of programs that have been taken up by some airlines over the next few months. We talk about early 2021. We're seeing demand for engines now that we have. So we've taken the numbers, and prior to COVID, our engine utilization was as high as 80%. So we basically mapped out, and we continue to see high utilization on the freighter fleets, and it's really the recovery of the pasture markets that is taking the numbers up to back to levels where they historically were. And part of that, as I mentioned, is the fact that shop visits are way down. So if you have excess available engines and you stop doing all shop visits, you quickly use up available engines, and you'll see engine utilization increase well before aircraft utilization. Because aircraft last a very long time. Engines have to go into shop every five years.
spk14: Actually, Joe, that's a nice segue into my follow-up question on the MRO deal with Lockheed. You know, you guys have got capacity to kind of increase up to 300 units annually. Can you give us a sense of where that minimum is? I realize you probably can't speak to exactly the level, but clearly you're going to have a need for 40 shop visits a year. How many visits above that or above that amount or are you guys kind of required to have throughput at the facility for the module factory?
spk02: The minimum would be well below that amount, not above it. So it's not something that I think is a significant commitment or worry about us being able to meet that minimum.
spk14: But, I mean, the number which I was referring to is, like, you're basically required 40 shop visits annually. I'm assuming it's above the 40, but obviously significantly below the 300.
spk02: You mean what our fleet would be?
spk14: Correct, yeah. Like, what your required throughput is going to be anyway on an annual basis.
spk02: Well, when you say required, you know, the minimum is going to be very low of what a minimum committed is. you know, amount we have to give as part of the deal, well below what our current, you know, requirements are. So you can approximate how many shop visits you'll have by just taking, you know, 20% of the total number of CFM engines we own, which is if, I said if we had 200 engines, 20% is about 40 shop visits a year today. And we expect that to grow, but the minimum that we've committed is well below that number.
spk14: Okay, that's really helpful just so we can understand kind of the risk return parameter there. And my final question is with regard to the 200 million of LOIs, can you give us a sense of when you expect that capital to be deployed just so, you know, we're kind of incorporating the right level of EBITDA from the LOIs for kind of 2021? Is this an early one? Yeah, I think it will be...
spk02: I think it will be late Q4 and early Q1.
spk14: Perfect. Appreciate the time, guys. Thanks.
spk07: Your final question comes from Robert Dodd of Raymond James.
spk04: Hi, guys. Just a follow-up on that one first and then one other. It should be quick. On the MROs, Joe, on the minimums, does that minimum have an escalator over time or is the you know, building in the assumption of growth or is the minimum just the minimum?
spk02: No. And it has rollover points too. So, you know, if you don't use it, you can roll it. So it's very flexible. I don't think that will be as significant. I have very little concern about that minimum that we ever get anywhere near it. Okay. Perfect.
spk04: On the other part, on the various elements you talked about, obviously the 450 and EBITDA from the equipment, the Lockheed various components of that that you spelled out that could add up to, you know, eventually like an incremental 100 million a year. You mentioned when you said that, you know, based on existing contracts, approvals, et cetera. So did that include any benefit from the parts approval? or not, and to put it in another perspective, if your first part got approved by the FAA, say, tomorrow, would the impact from that already be included in what you've discussed, or would that be incremental on top of that? And could you give us a ballpark if it would be incremental?
spk02: Well, I think when you go through the pieces to it, the element that I think that will be... facilitated, but not necessarily required to get that is being able to manage shop visits for other airlines. I mentioned the partnering of 250 engines or 50 shop visits a year. The approval of those parts will be helpful for us to make that million dollars and save the airline a million. So it's not entirely... It's not entirely impossible. We couldn't do that without it, but it will be facilitated by that. So I would say a portion of the $100 million is really a function of us having these first two parts available next year.
spk04: Got it.
spk02: I appreciate it. Thank you. Yes.
spk07: There are no further questions at this time. I would like to turn the conference back over to Mr. Andrini for closing remarks.
spk08: Thank you, Operator, and thank you all for participating in today's conference call. We look forward to updating you after Q4. Thank you.
spk07: This concludes today's conference. You may disconnect at this time.
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