FORS TRAN
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") is intended to help you understand Fortress
Transportation and Infrastructure Investors LLC . Our MD&A should be read in
conjunction with our consolidated financial statements and the accompanying
notes, and with Part I, Item 1A, "Risk Factors" and "Forward-Looking Statements"
included elsewhere in this Annual Report on Form 10-K.
A discussion of our results of operations for 2018 compared to 2017 is included
in our Annual Report on Form 10-K for the year ended December 31, 2018 , under
Part II, Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
We own and acquire high quality infrastructure and related equipment that is
essential for the transportation of goods and people globally. We target assets
that, on a combined basis, generate strong cash flows with potential for
earnings growth and asset appreciation. We believe that there are a large number
of acquisition opportunities in our markets, and that our Manager's expertise
and business and financing relationships, together with our access to capital,
will allow us to take advantage of these opportunities. We are externally
managed by the Manager, an affiliate of Fortress, which has a dedicated team of
experienced professionals focused on the acquisition of transportation and
infrastructure assets since 2002. As of December 31, 2019 , we had total
consolidated assets of $3.2 billion and total equity of $1.3 billion .
While our strategy permits us to acquire a broad array of transportation-related
assets, we are currently active in four sectors where we believe there are
meaningful opportunities to deploy capital to achieve attractive risk adjusted
returns: aviation, energy, intermodal transport and ports and terminals.
•Commercial air travel and air freight activity have historically been long-term
growth sectors and are tied to the underlying demand for passenger and freight
movement. We continue to see strong demand for aviation related assets.
•Offshore energy service equipment refers to vessels supporting the extraction,
processing and transportation of oil and natural gas from deposits located
beneath the sea floor, as well as the ongoing inspection, repair, maintenance
and ultimate abandonment of subsea wells and associated infrastructure. The
prolonged oil price decline has led to oil and gas companies reducing and
deferring spending decisions, creating an oversupply of offshore energy assets,
and in turn, lower day-rates, utilization and earnings for offshore service
companies. These rates, however, have partially rebounded over the course of
2018 and 2019.
•The intermodal transport market includes the efficient movement of goods
throughout multiple modes of transportation, making it possible to move cargo
from a point of origin to a final destination without repeated unpacking and
repacking. Over the last year, new container prices have decreased slightly, but
remain above the lows reached in 2015.
•Land-based infrastructure refers to facilities that enable the storage,
unloading, loading and movement of crude oil and refined products from producers
to end users, such as refineries. Customers of land-based infrastructure
typically purchase capacity on a take-or-pay basis, and the economics of these
assets directly relate to the volume of throughput.
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Operating Segments Our operations consist of two primary strategic business units -Infrastructure and Equipment Leasing . Our Infrastructure Business acquires long-lived assets that provide mission-critical services or functions to transportation networks and typically have high barriers to entry. We target or develop operating businesses with strong margins, stable cash flows and upside from earnings growth and asset appreciation driven by increased use and inflation. Our Equipment Leasing Business acquires assets that are designed to carry cargo or people or provide functionality to transportation infrastructure. Transportation equipment assets are typically long-lived, moveable and leased by us on either operating leases or finance leases to companies that provide transportation services. Our leases generally provide for long-term contractual cash flow with high cash-on-cash yields and include structural protections to mitigate credit risk. Our reportable segments are comprised of interests in different types of infrastructure and equipment leasing assets. We currently conduct our business through the following three reportable segments: (i)Aviation Leasing , which is within the Equipment Leasing Business, and (ii)Jefferson Terminal and (iii) Ports and Terminals, which together comprise our Infrastructure Business.The Aviation Leasing segment consists of aircraft and aircraft engines held for lease and are typically held long-term.The Jefferson Terminal segment consists of a multi-modal crude and refined products terminal and other related assets which were acquired in 2014. The Ports and Terminals segment consists of Repauno, acquired in 2016, a 1,630 acre deep-water port located along theDelaware River with an underground storage cavern and multiple industrial development opportunities. Additionally, Ports and Terminals includes an equity method investment ("Long Ridge "), which is a 1,660 acre multi-modal port located along theOhio River with rail, dock, and multiple industrial development opportunities, including a power plant under construction. InDecember 2019 , we completed the sale of substantially all of our railroad business, which was formerly reported as our Railroad segment. Under ASC 205-20, this disposition met the criteria to be reported as discontinued operations and the assets, liabilities and results of operations have been presented as discontinued operations for all periods presented. Corporate and Other primarily consists of debt, unallocated corporate general and administrative expenses, and management fees. Additionally, Corporate and Other includes (i) offshore energy related assets which consist of vessels and equipment that support offshore oil and gas activities and are typically subject to long-term operating leases, (ii) an investment in an unconsolidated entity engaged in the leasing of shipping containers on both an operating lease and finance lease basis and (iii) railroad assets retained after theDecember 2019 sale, which consists of equipment that support a railcar cleaning business. During 2019, we updated our segment performance measure from Adjusted Net Income to Adjusted EBITDA (see definition below) as this is the primary performance measure that our Chief Operating Decision Maker ("CODM") utilizes to assess operational performance, as well as make resource and allocation decisions. In connection with the change in our performance measure, in accordance with ASC 280, we also assessed our reportable segments. We determined that our Offshore Energy and Shipping Containers segments no longer met the requirement as reportable segments. In addition, with theDecember 2019 sale of substantially all of our railroad business, the Railroad segment no longer met the requirement as a reportable segment. Accordingly, we have presented these operating segments, along with Corporate results, within Corporate and Other effective in 2019. All prior periods have been restated for historical comparison across segments. Our reportable segments are comprised of investments in different types of transportation infrastructure and equipment. Each segment requires different investment strategies. The accounting policies of the segments are the same as those described in Note 2 to the consolidated financial statements; however, financial information presented by segment includes the impact of intercompany eliminations. Results of Operations Adjusted EBITDA (non-GAAP) The CODM utilizes Adjusted EBITDA as the key performance measure. This performance measure provides the CODM with the information necessary to assess operational performance, as well as make resource and allocation decisions. Adjusted EBITDA is defined as net income attributable to shareholders from continuing operations, adjusted (a) to exclude the impact of provision for (benefit from) income taxes, equity-based compensation expense, acquisition and transaction expenses, losses on the modification or extinguishment of debt and capital lease obligations, changes in fair value of non-hedge derivative instruments, asset impairment charges, incentive allocations, depreciation and amortization expense, and interest expense, (b) to include the impact of our pro-rata share of Adjusted EBITDA from unconsolidated entities and (c) to exclude the impact of equity in earnings (losses) of unconsolidated entities and the non-controlling share of Adjusted EBITDA. 38
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The following table presents our consolidated results of operations:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Revenues
Equipment leasing revenues
Lease income $ 207,101 $ 157,190 $ 99,536 $ 49,911 $ 57,654
Maintenance revenue 134,914 89,870 65,651 45,044 24,219
Finance lease income 2,648 3,349 1,536 (701) 1,813
Other revenue 4,659 2,630 3,277 2,029 (647)
Total equipment leasing revenues 349,322 253,039 170,000 96,283 83,039
Infrastructure revenues
Lease income 3,362 1,734 1,111 1,628 623
Terminal services revenues 42,965 10,108 10,229 32,857 (121)
Crude marketing revenues 166,134 60,518 - 105,616 60,518
Other revenue 16,991 16,713 3,712 278 13,001
Total infrastructure revenues 229,452 89,073 15,052 140,379 74,021
Total revenues 578,774 342,112 185,052 236,662 157,060
Expenses
Operating expenses 288,036 136,570 62,419 151,466 74,151
General and administrative 20,441 17,126 14,570 3,315 2,556
Acquisition and transaction expenses 17,623 6,968 7,306 10,655 (338)
Management fees and incentive
allocation to affiliate 36,059 15,726 15,732 20,333 (6)
Depreciation and amortization 169,023 133,908 86,073 35,115 47,835
Interest expense 95,585 56,845 37,798 38,740 19,047
Total expenses 626,767 367,143 223,898 259,624 143,245
Other income (expense)
Equity in losses of unconsolidated
entities (2,375) (1,008) (1,601) (1,367) 593
Gain on sale of assets, net 203,250 3,911 18,593 199,339 (14,682)
Loss on extinguishment of debt - - (2,456) - 2,456
Asset impairment (4,726) - - (4,726) -
Interest income 531 488 688 43 (200)
Other income 3,445 3,983 3,073 (538) 910
Total other income 200,125 7,374 18,297 192,751 (10,923)
Income (loss) from continuing
operations before income taxes 152,132 (17,657) (20,549) 169,789 2,892
Provision for income taxes 17,810 2,449 1,954 15,361 495
Net income (loss) from continuing
operations 134,322 (20,106) (22,503) 154,428 2,397
Net income (loss) from discontinued
operations, net of income taxes 73,462 4,402 (737) 69,060 5,139
Net income (loss) 207,784 (15,704) (23,240) 223,488 7,536
Less: Net (loss) income attributable
to non-controlling interest in
consolidated subsidiaries:
Continuing operations (17,571) (21,925) (23,304) 4,354 1,379
Discontinued operations 247 339 (70) (92) 409
Dividends on preferred shares 1,838 - - 1,838 -
Net income attributable to
shareholders $ 223,270 $ 5,882 $ 134 $ 217,388 $ 5,748
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The following table sets forth a reconciliation of net income attributable to shareholders from continuing operations to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Net income attributable to shareholders
from continuing operations $ 150,055 $ 1,819
17,810 2,449 1,954 15,361 495
Add: Equity-based compensation expense 1,509 717 613 792 104
Add: Acquisition and transaction expenses 17,623 6,968 7,306 10,655 (338)
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations - - 2,456 - (2,456)
Add: Changes in fair value of non-hedge
derivative instruments 4,555 (5,523) (1,022) 10,078 (4,501)
Add: Asset impairment charges 4,726 - - 4,726 -
Add: Incentive allocations 21,231 407 514 20,824 (107)
Add: Depreciation & amortization expense
(1) 199,185 160,567 94,380 38,618 66,187
Add: Interest expense 95,585 56,845 37,798 38,740 19,047
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (2) (1,387) 359 (243) (1,746) 602
Less: Equity in losses of unconsolidated
entities 2,375 1,008 1,601 1,367 (593)
Less: Non-controlling share of Adjusted
EBITDA (3) (9,859) (9,744) (12,535) (115) 2,791
Adjusted EBITDA (non-GAAP) $ 503,408 $ 215,872 __________________________________________________
(1) Includes the following items for the years endedDecember 31, 2019 , 2018 and 2017: (i) depreciation and amortization expense of$169,023 ,$133,908 and$86,073 , (ii) lease intangible amortization of$7,181 ,$8,588 and$4,716 and (iii) amortization for lease incentives of$22,981 ,$18,071 and$3,591 , respectively. (2) Includes the following items for the years endedDecember 31, 2019 , 2018 and 2017: (i) net loss of$(2,563) ,$(1,196) and$(1,786) , (ii) interest expense of$131 ,$477 and$785 and (iii) depreciation and amortization expense of$1,045 ,$1,078 and$758 , respectively. (3) Includes the following items for the years endedDecember 31, 2019 , 2018 and 2017: (i) equity based compensation of$230 ,$113 and$125 , (ii) provision for income taxes of$60 ,$57 and$16 , (iii) interest expense of$3,400 ,$4,624 and$4,968 , (iv) depreciation and amortization expense of$4,833 ,$6,049 and$7,022 and (v) changes in fair value of non-hedge derivative instruments of$1,336 ,$(1,099) and$404 , respectively. Comparison of the year endedDecember 31, 2019 to the year endedDecember 31, 2018 Revenues Total revenues increased$236.7 million primarily due to higher revenues in theAviation Leasing ,Jefferson Terminal and Ports and Terminals segments.Equipment Leasing •Lease income increased$49.9 million primarily driven by an increase in assets on lease in theAviation Leasing segment. •Maintenance revenue increased by$45.0 million as we increased the number of aircraft and engines subject to leases with maintenance arrangements. Infrastructure •Crude marketing revenues increased$105.6 million primarily due to theJefferson Terminal segment. During the third quarter of 2018, Jefferson initiated a strategy inCanada sourcing crude from producers, arranging logistics toJefferson Terminal and marketing crude to third parties. Jefferson exited this strategy in the fourth quarter of 2019. •Terminal services revenue increased$32.9 million which primarily reflects increases of approximately (i)$25.8 million due to increased storage capacity and activity atJefferson Terminal and (ii)$7.1 million due to increased activity atLong Ridge . Expenses Total expenses increased$259.6 million primarily due to increases in (i) operating expenses, (ii) interest expense, (iii) depreciation and amortization and (iv) management fees and incentive allocation to affiliate. Operating expenses increased$151.5 million primarily due to increases in: 40
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•cost of sales of$125.6 million primarily due to costs associated with crude marketing in theJefferson Terminal segment; •facility operations of$16.0 million primarily in theJefferson Terminal and Ports and Terminals segments due to higher volume associated with crude marketing and increased activity atJefferson Terminal and an increase in transloading volumes atLong Ridge ; and •compensation and benefits of$7.6 million primarily due to an increase in headcount in theJefferson Terminal and Ports and Terminals segments. Interest expense increased$38.7 million primarily due to an increase in our average outstanding debt of approximately$623.9 million , which primarily consists of increases in the (i) senior unsecured notes due 2025 ("2025 Notes") of$400.0 million , (ii)Long Ridge Generation LLC ("LREG") Credit Agreement of$73.4 million , (iii) senior unsecured notes due 2022 ("2022 Notes") of$65.8 million , (iv) Revolving Credit Facility of$48.8 million , (v) our subsidiary's revolving credit facility ("Jefferson Revolver") of$25.1 million and (vi) our subsidiary's revolving credit facility ("DRP Revolver") of$18.9 million . Depreciation and amortization increased$35.1 million primarily due to additional assets acquired in theAviation Leasing segment and assets placed into service in theJefferson Terminal and Ports and Terminals segments. Management fees and incentive allocation to affiliate increased$20.3 million primarily due to incentive fees paid to the Manager related to gains on sale recognized during the period. Other income Total other income increased$192.8 million which primarily reflects (i) a gain on sale of$116.7 million due to the sale of a 49.9% interest inLong Ridge (the "Long Ridge Transaction"), (ii) an increase in gains on sale of$78.0 million due to asset sales in theAviation Leasing segment, partially offset by (iii) an impairment of$4.7 million at Long Ridge due to the expiration of unused gas leases. Provision for income taxes The provision for income taxes increased$15.4 million which primarily reflects deferred tax expense in the Ports and Terminals segment due to the gain on sale for the Long Ridge Transaction. Net income from continuing operations Net income from continuing operations increased$154.4 million primarily due to the changes discussed above. Net income from discontinued operations, net of income taxes Net income from discontinued operations, net of income taxes increased$69.1 million due to the sale of our railroad business inDecember 2019 . Adjusted EBITDA (non-GAAP) Adjusted EBITDA increased$287.5 million primarily due to the changes noted above. 41
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Aviation Leasing Segment As ofDecember 31, 2019 , in ourAviation Leasing segment, we own and manage 238 aviation assets, including 74 aircraft and 164 commercial engines. As ofDecember 31, 2019 , 69 of our commercial aircraft and 108 of our engines were leased to operators or other third parties. Aviation assets currently off lease are either undergoing repair and/or maintenance, being prepared to go on lease or held in short term storage awaiting a future lease. Our aviation equipment was approximately 80% utilized as ofDecember 31, 2019 , based on the equity value of our on-hire leasing equipment as a percentage of the total equity value of our aviation leasing equipment. Our aircraft currently have a weighted average remaining lease term of 29 months, and our engines currently on-lease have an average remaining lease term of 10 months. The table below provides additional information on the assets in ourAviation Leasing segment: Aviation Assets Widebody Narrowbody Total Aircraft Assets at January 1, 2019 14 56 70 Purchases 4 27 31 Sales (1) (4) (5) Transfers (3) (19) (22) Assets at December 31, 2019 14 60 74 Engines Assets at January 1, 2019 78 64 142 Purchases 23 8 31 Sales (19) (39) (58) Transfers 10 39 49 Assets at December 31, 2019 92 72 164
The following table presents our results of operations:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Equipment leasing revenues
Lease income $ 197,305 $ 151,531 $ 91,103 $ 45,774 $ 60,428
Maintenance revenue 134,914 89,870 65,651 45,044 24,219
Finance lease income 2,648 1,895 - 753 1,895
Other revenue 1,808 974 39 834 935
Total revenues 336,675 244,270 156,793 92,405 87,477
Expenses
Operating expenses 14,132 9,149 6,247 4,983 2,902
Acquisition and transaction expenses 518 315 441 203 (126)
Depreciation and amortization 128,990 102,419 61,795 26,571 40,624
Total expenses 143,640 111,883 68,483 31,757 43,400
Other income
Equity in losses of unconsolidated entities (1,829) (743) (1,276) (1,086) 533
Gain on sale of assets, net 81,954 3,911 7,188 78,043 (3,277)
Interest income 104 202 297 (98) (95)
Total other income 80,229 3,370 6,209 76,859 (2,839)
Income before income taxes 273,264 135,757 94,519 137,507 41,238
Provision for income taxes 2,826 2,280 1,966 546 314
Net income 270,438 133,477 92,553 136,961 40,924
Less: Net (loss) income attributable to
non-controlling interest in consolidated
subsidiaries - (24) 697 24 (721)
Net income attributable to shareholders
$ 91,856 $ 136,937 $ 41,645 42
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The following table sets forth a reconciliation of net income attributable to shareholders to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Net income attributable to shareholders
2,826 2,280 1,966 546 314
Add: Equity-based compensation expense - - - - -
Add: Acquisition and transaction expenses 518 315 441 203 (126)
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations - - - - -
Add: Changes in fair value of non-hedge
derivative instruments - - - - -
Add: Asset impairment charges - - - - -
Add: Incentive allocations - - - - -
Add: Depreciation and amortization expense
(1) 159,152 129,078 70,102 30,074 58,976
Add: Interest expense - - - - -
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (2) (1,829) (743) (1,276) (1,086) 533
Less: Equity in losses of unconsolidated
entities 1,829 743 1,276 1,086 (533)
Less: Non-controlling share of Adjusted
EBITDA (3) - (172) (537) 172 365
Adjusted EBITDA (non-GAAP) $ 432,934 $ 265,002 __________________________________________________
(1) Includes the following items for the years endedDecember 31, 2019 , 2018 and 2017: (i) depreciation expense of$128,990 and$102,419 and$61,795 , (ii) lease intangible amortization of$7,181 ,$8,588 and$4,716 and (iii) amortization for lease incentives of$22,981 ,$18,071 and$3,591 , respectively. (2) Includes the proportionate share of the unconsolidated entities' net income adjusted for the excluded and included items detailed in the table, for which there were no adjustments. (3) Includes depreciation and amortization expense of$0 ,$172 and$537 for the years endedDecember 31, 2019 , 2018 and 2017, respectively. Comparison of the year endedDecember 31, 2019 to the year endedDecember 31, 2018 Revenues Total revenues increased$92.4 million driven by higher lease income and maintenance revenue. •Lease income increased$45.8 million mainly due to an increase in (i) aircraft lease income of$35.1 million primarily driven by the addition of 14 aircraft on lease and (ii) engine lease income of$10.7 million primarily driven by an additional 15 revenue generating engines in 2019 compared to 2018. •Maintenance revenue increased$45.0 million due to an increase in (i) the number of aircraft and engines on lease and (ii) end-of-lease maintenance compensation for four aircraft. Expenses Total expenses increased$31.8 million primarily due to an increase in depreciation and amortization expense and operating expenses. •Depreciation and amortization expense increased$26.6 million driven by additional aircraft and engines owned and on lease in 2019 compared to 2018. •Operating expenses increased$5.0 million primarily as a result of increases in (i) shipping and storage fees of$1.6 million due to the positioning of our assets for lease, (ii) bad debt expense of$1.5 million related to an engine loss receivable deemed uncollectible due to bankruptcy, (iii) repairs and maintenance expenses of$0.6 million , (iv) professional fee expenses of$0.5 million and (v) other operating expenses of$0.8 million . Other income Total other income increased$76.9 million primarily due to an increase of$78.0 million in gain on the sale of leasing equipment in 2019 partially offset due to a decrease of$1.1 million inAviation Leasing's proportionate share of the unconsolidated entities' net income. Adjusted EBITDA (non-GAAP) Adjusted EBITDA increased$167.9 million primarily due to the changes in net income attributable to shareholders noted above, and higher depreciation and amortization expense for the additional aircraft and engines owned and on lease. 43
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Jefferson Terminal Segment
The following table presents our results of operations:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Infrastructure revenues
Lease income $ 2,306 $ 272 $ - $ 2,034 $ 272
Terminal services revenues 35,908 10,108 10,229 25,800 (121)
Crude marketing revenues 166,134 60,518 - 105,616 60,518
Other revenue - 87 - (87) 87
Total revenues 204,348 70,985 10,229 133,363 60,756
Expenses
Operating expenses 231,506 94,622 31,213 136,884 63,409
Depreciation and amortization 22,873 19,745 16,193 3,128 3,552
Interest expense 16,189 15,513 13,568 676 1,945
Total expenses 270,568 129,880 60,974 140,688 68,906
Other income (expense)
Equity in losses of unconsolidated entities (292) (574) (321) 282 (253)
Gain on sale of assets, net 4,636 - - 4,636 -
Interest income 118 270 376 (152) (106)
Other income 634 3,983 1,980 (3,349) 2,003
Total other income 5,096 3,679 2,035 1,417 1,644
Loss before income taxes (61,124) (55,216) (48,710) (5,908) (6,506)
Provision for income taxes 284 261 42 23 219
Net loss (61,408) (55,477) (48,752) (5,931) (6,725)
Less: Net loss attributable to
non-controlling interest in consolidated
subsidiaries (17,356) (21,801) (22,991) 4,445 1,190
Net loss attributable to shareholders
$ (25,761) $ (10,376) $ (7,915) 44
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The following table sets forth a reconciliation of net loss attributable to shareholders to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Net loss attributable to shareholders
284 261 42 23 219
Add: Equity-based compensation expense 1,054 359 318 695 41
Add: Acquisition and transaction expenses - - - - -
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations - - - - -
Add: Changes in fair value of non-hedge
derivative instruments 6,364 (5,523) (1,022) 11,887 (4,501)
Add: Asset impairment charges - - - - -
Add: Incentive allocations - - - - -
Add: Depreciation and amortization expense 22,873 19,745 16,193 3,128 3,552
Add: Interest expense 16,189 15,513 13,568 676 1,945
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (1) 656 478 (321) 178 799
Less: Equity in losses of unconsolidated
entities 292 574 321 (282) 253
Less: Non-controlling share of Adjusted
EBITDA (2) (9,820) (9,376) (11,751) (444) 2,375
Adjusted EBITDA (non-GAAP) $ (6,160) $ (11,645) __________________________________________________
(1) Includes the following items for the years endedDecember 31, 2019 , 2018 and 2017: (i) net loss of$(349) ,$(574) and$(321) and (ii) depreciation and amortization expense of$1,005 ,$1,052 and$0 , respectively. (2) Includes the following items for the years endedDecember 31, 2019 , 2018 and 2017: (i) equity-based compensation of$221 ,$106 and$125 , (ii) provision for income taxes of$60 ,$57 and$16 , (iii) interest expense of$3,400 ,$4,465 and$4,886 , (iv) changes in fair value of non-hedge derivative instruments of$1,336 ,$(1,099) and$404 and (v) depreciation and amortization expense of$4,803 ,$5,847 and$6,320 , respectively. Comparison of the year endedDecember 31, 2019 to the year endedDecember 31, 2018 Revenues Total revenues increased$133.4 million primarily due to an increase in crude marketing revenue of$105.6 million . During the third quarter of 2018, Jefferson initiated a strategy inCanada sourcing crude from producers, arranging logistics toJefferson Terminal and marketing crude to third parties. Jefferson exited this strategy in the fourth quarter of 2019. Additionally, terminal services revenue increased$25.8 million primarily due to increased storage capacity and activity. Expenses Total expenses increased$140.7 million primarily reflecting higher operating expenses of$136.9 million . The increase in operating expenses reflected higher: •cost of sales of$125.7 million , resulting from costs associated with crude marketing; •facility operations expense of$9.2 million due to higher volume associated with crude marketing and increased activity at the terminal; and •compensation and benefits expense of$4.1 million resulting from an increase in headcount. Additionally, the increase in expense reflected higher depreciation expense of$3.1 million due to additional assets placed into service. Other income Total other income increased$1.4 million primarily due to a gain on sale of$4.6 million , partially offset by a decrease in other income of$3.3 million due to lower gains on our derivatives in 2019. Adjusted EBITDA (non-GAAP) Adjusted EBITDA increased$5.5 million primarily due to an increase in the changes in non-hedge derivative instruments offset with the changes in net loss attributable to shareholders as described above. 45
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Ports and Terminals
The following table presents our results of operations:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Infrastructure revenues
Lease income $ 1,056 $ 1,462 Terminal services revenues 7,057 - - 7,057 - Other revenue 14,074 15,982 3,712 (1,908) 12,270 Total revenues 22,187 17,444 4,823 4,743 12,621 Expenses Operating expenses 24,854 18,312 9,117 6,542 9,195 Acquisition and transaction expenses 5,008 - - 5,008 - Depreciation and amortization 9,849 5,139 1,658 4,710 3,481 Interest expense 1,712 649 1,088 1,063 (439) Total expenses 41,423 24,100 11,863 17,323 12,237 Other income Equity in losses of unconsolidated entities (192) - - (192) - Gain on sale of assets, net 116,660 - - 116,660 - Asset impairment (4,726) - - (4,726) - Interest income 289 - - 289 - Other income 1,809 - - 1,809 - Total other income 113,840 - - 113,840 - Income (loss) before income taxes 94,604 (6,656) (7,040) 101,260 384 Provision for income taxes 14,700 1 - 14,699 1 Net income (loss) 79,904 (6,657) (7,040) 86,561 383 Less: Net loss attributable to non-controlling interest in consolidated subsidiaries (215) (100) (484) (115) 384 Net income (loss) attributable to shareholders$ 80,119 $ (6,557) $ (6,556) $ 86,676 $ (1) 46
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The following table sets forth a reconciliation of net income (loss) attributable to shareholders to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Net income (loss) attributable to
shareholders $ 80,119 $ (6,557)
14,700 1 - 14,699 1
Add: Equity-based compensation expense 455 349 295 106 54
Add: Acquisition and transaction expenses 5,008 - - 5,008 -
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations - - - - -
Add: Changes in fair value of non-hedge
derivative instruments (1,809) - - (1,809) -
Add: Asset impairment charges 4,726 - - 4,726 -
Add: Incentive allocations - - - - -
Add: Depreciation and amortization
expense 9,849 5,139 1,658 4,710 3,481
Add: Interest expense 1,712 649 1,088 1,063 (439)
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (1) (153) - - (153) -
Less: Equity in earnings of
unconsolidated entities 192 - - 192 -
Less: Non-controlling share of Adjusted
EBITDA (2) (39) (196) - 157 (196)
Adjusted EBITDA (non-GAAP) $ 114,760 $ (615) __________________________________________________
(1) Includes (i) net loss of$(193) and (ii) depreciation expense of$40 for the year endedDecember 31, 2019 . (2) Includes the following items for the years endedDecember 31, 2019 and 2018: (i) equity-based compensation of$9 and$7 , (ii) interest expense of$0 and$159 and (iii) depreciation expense of$30 and$30 , respectively. Comparison of the year endedDecember 31, 2019 to the year endedDecember 31, 2018 Revenues Total revenues increased$4.7 million , primarily due to additional trans-loading revenue of$2.5 million and revenue related to oil and gas activities of$1.7 million at Long Ridge. The increase was accompanied by an additional$0.5 million from Repauno relating to butane sales. Expenses Total expenses increased$17.3 million primarily due to increases in (i) operating expenses of$6.5 million (ii) acquisition and transaction expense of$5.0 million and (iii) depreciation expense of$4.7 million related to property, plant and equipment. The increase in operating expenses was primarily driven by higher: •operating expenses to operate proved developed natural gas wells of$1.4 million ; •compensation and benefits of$1.8 million due to increased headcount; •facility operations of$1.7 million related to an increase in transloading volumes at Long Ridge; •repair and maintenance cost of$0.7 million ; •cost of sales of$0.6 million related to the sale of butane; and •bad debt expense of$0.3 million . Acquisition and transaction expense increased due to transaction costs associated with the Long Ridge Transaction. Depreciation expense increased due to a larger asset base as a result of assets placed into service during the year, the depletion of gas reserves and a revision to total proved reserve volumes at Long Ridge. Other income Total other income increased$113.8 million which primarily reflects (i) a gain on sale of$116.7 million from the Long Ridge Transaction, partially offset by (ii) an impairment of$4.7 million at Long Ridge due to the expiration of unproved gas leases. Provision for income taxes The provision for income taxes increased$14.7 million which primarily reflects deferred tax expense due to the gain on sale for the Long Ridge Transaction. 47
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Adjusted EBITDA (non-GAAP) Adjusted EBITDA increased$115.4 million primarily due to the changes in net income (loss) attributable to shareholders noted above. Corporate and Other The following table presents our results of operations: Year Ended December 31, Change (in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17 Equipment leasing revenues Lease income$ 9,796 $ 5,659 $ 8,433 $ 4,137 $ (2,774) Finance lease income - 1,454 1,536 (1,454) (82) Other revenue 2,851 1,656 3,238 1,195 (1,582) Total equipment leasing revenues 12,647 8,769 13,207 3,878 (4,438) Infrastructure revenues Other revenue 2,917 644 - 2,273 644 Total infrastructure revenues 2,917 644 - 2,273 644 Total revenues 15,564 9,413 13,207 6,151 (3,794) Expenses Operating expenses 17,544 14,487 15,842 3,057 (1,355) General and administrative 20,441 17,126 14,570 3,315 2,556 Acquisition and transaction expenses 12,097 6,653 6,865 5,444 (212) Management fees and incentive allocation to affiliate 36,059 15,726 15,732 20,333 (6) Depreciation and amortization 7,311 6,605 6,427 706 178 Interest expense 77,684 40,683 23,142 37,001 17,541 Total expenses 171,136 101,280 82,578 69,856 18,702 Other expense Equity in (losses) earnings of unconsolidated entities (62) 309 (4) (371) 313 Gain on sale of assets, net - - 11,405 - (11,405) Loss on extinguishment of debt - - (2,456) - 2,456 Interest income 20 16 15 4 1 Other income 1,002 - 1,093 1,002 (1,093) Total other income 960 325 10,053 635 (9,728) Loss before income taxes (154,612) (91,542) (59,318) (63,070) (32,224) Benefit from income taxes - (93) (54) 93 (39) Net loss (154,612) (91,449) (59,264) (63,163) (32,185) Less: Net loss attributable to non-controlling interest in consolidated subsidiaries - - (526) - 526 Dividends on preferred shares 1,838 - - 1,838 -
Net loss attributable to shareholders
$ (58,738) $ (65,001) $ (32,711) 48
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The following table sets forth a reconciliation of net loss attributable to shareholders to Adjusted EBITDA:
Year Ended December 31, Change
(in thousands) 2019 2018 2017 '19 vs '18 '18 vs '17
Net loss attributable to shareholders
- (93) (54) 93 (39)
Add: Equity-based compensation expense - 9 - (9) 9
Add: Acquisition and transaction expenses 12,097 6,653 6,865 5,444 (212)
Add: Losses on the modification or
extinguishment of debt and capital lease
obligations - - 2,456 - (2,456)
Add: Changes in fair value of non-hedge
derivative instruments - - - - -
Add: Asset impairment charges - - - - -
Add: Incentive allocations 21,231 407 514 20,824 (107)
Add: Depreciation and amortization expense 7,311 6,605 6,427 706 178
Add: Interest expense 77,684 40,683 23,142 37,001 17,541
Add: Pro-rata share of Adjusted EBITDA
from unconsolidated entities (1) (61) 624 1,354 (685) (730)
Less: Equity in earnings of unconsolidated
entities 62 (309) 4 371 (313)
Less: Non-controlling share of Adjusted
EBITDA (2) - - (247) - 247
Adjusted EBITDA (non-GAAP) $ (38,126) $ (36,870) __________________________________________________
(1) Includes the following items for the years endedDecember 31, 2019 , 2018 and 2017: (i) net (loss) income of$(192) ,$121 and$(189) , (ii) interest expense of$131 ,$477 and$785 and (iii) depreciation expense of$0 ,$26 and$758 , respectively. (2) Includes (i) interest expense of$82 and (ii) depreciation expense of$165 for the year endedDecember 31, 2017 . Comparison of the year endedDecember 31, 2019 to the year endedDecember 31, 2018 RevenuesEquipment Leasing •Equipment leasing revenues increased$3.9 million due to (i) an increase in lease income of$4.1 million due to our vessels being on-hire for longer in 2019 compared to 2018, (ii) an increase in other revenue of$1.2 million due to higher victualling income as our vessels were on-hire for longer in 2019 compared to 2018, partially offset by (iii) a decrease in finance lease income of$1.5 million as one of our vessels was on nonaccrual status due to a casualty event. Infrastructure •Other revenue increased$2.3 million due to the railcar cleaning business being operational for all of 2019 compared to the second half of 2018. Expenses Total expenses increased$69.9 million primarily due to increases in: •interest expense of$37.0 million which reflects an increase in the average outstanding debt of approximately$507.8 million , which primarily consists of the 2025 Notes of$400.0 million , 2022 Notes of$65.8 million and Revolving Credit Facility of$48.8 million ; •management fees and incentive allocation to affiliate of$20.3 million due to incentive fees paid to the Manager related to gains on sale recognized during the period; •acquisition and transaction expenses of$5.4 million primarily due to a higher volume of transactions in 2019. Adjusted EBITDA (non-GAAP) Adjusted EBITDA decreased$1.3 million primarily due to the changes noted above. 49
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Transactions with Affiliates and Affiliated Entities We are managed by the Manager, an affiliate of Fortress, pursuant to the Management Agreement which provides for us to bear obligations for management fees and expense reimbursements payable to the Manager. Our Management Agreement requires our Manager to manage our business affairs in conformity with a broad asset acquisition strategy adopted and monitored by our board of directors. From time to time, we may engage (subject to our strategy) in material transactions with our Manager or another entity managed by our Manager or one of its affiliates or other affiliates of Fortress, which may include, but are not limited to, certain financing arrangements, acquisition of assets, acquisition of debt obligations, debt, co-investments, and other assets that present an actual, potential or perceived conflict of interest. Please see Note 16 to our consolidated financial statements included elsewhere in this filing for more information. Geographic Information Please refer to Note 17 of our consolidated financial statements included in Item 8 in this Annual Report on Form 10-K for a report, by geographic area for each segment, of revenues from our external customers, for the years endedDecember 31, 2019 , 2018 and 2017, as well as a report, by geographic area for each segment, of our total property, plant and equipment and equipment held for lease as ofDecember 31, 2019 and 2018. Liquidity and Capital Resources Our principal uses of liquidity have been and continue to be (i) acquisitions or expansion of transportation infrastructure and equipment, (ii) distributions to our shareholders, (iii) expenses associated with our operating activities and (iv) debt service obligations associated with our investments. •Cash used for the purpose of making investments was$942.5 million ,$751.5 million , and$594.6 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. •Distributions to shareholders, including cash dividends, were$115.4 million ,$110.6 million and$100.1 million during the years endedDecember 31, 2019 , 2018 and 2017, respectively. •Uses of liquidity associated with our operating expenses are captured on a net basis in our cash flows from operating activities. Uses of liquidity associated with our debt obligations are captured in our cash flows from financing activities. Our principal sources of liquidity to fund these uses have been and continue to be (i) revenues from our transportation infrastructure and equipment assets (including finance lease collections and maintenance reserve collections) net of operating expenses, (ii) proceeds from borrowings or the issuance of securities and (iii) proceeds from asset sales. •Cash flows from operating activities, plus the principal collections on finance leases and maintenance reserve collections were$229.7 million ,$189.3 million and$96.0 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. •During the year endedDecember 31, 2019 , additional borrowings were obtained in connection with (i) the Revolving Credit Facility of$250.0 million , (ii) LREG Credit Agreement of$173.5 million , (iii) the 2025 Notes of$148.7 million , (iv) the 2022 Notes of$147.8 million , (v) the DRP Revolver of$25.0 million , (vi) the Jefferson Revolver of$23.2 million and (vii) CMQR Credit Agreement of$20.9 million . We made principal payments of$405.1 million primarily related to the Revolving Credit Facility, Jefferson Revolver and CMQR Credit Agreement. During the year endedDecember 31, 2018 , additional borrowings were obtained in connection with (i) the 2025 Notes of$291.0 million , (ii) the Revolving Credit Facility of$275.0 million , (iii) the 2022 Notes of$100.0 million , (iv) the Jefferson Revolver of$49.5 million and (v) the CMQR Credit Agreement of$35.5 million . We made principal payments of$218.8 million primarily related to the Revolving Credit Facility and the CMQR Credit Agreement. During the year endedDecember 31, 2017 , additional borrowings were obtained in connection with (i) the Term Loan of$97.2 million , net of deferred financing costs, (ii) the Revolving Credit Facility of$95.0 million , (iii) the CMQR Credit Agreement of$32.0 million and (iv) the Senior Notes of$343.0 million , net of deferred financing costs and repayment of the Term Loan. We made principal repayments of$125.2 million , primarily related to the FTAI Pride Credit Agreement, the Revolving Credit Facility and the CMQR Credit Agreement. •Proceeds from the sale of subsidiaries and assets were$432.3 million ,$44.1 million and$121.4 million during the years endedDecember 31, 2019 , 2018, and 2017, respectively. •Proceeds from the issuance of common shares were$148.3 million , net of issuance costs of$0.8 million , during the year endedDecember 31, 2018 . There were no issuances of common shares in 2019. •Proceeds from the issuance of preferred shares, net of underwriters discount and issuance costs, were$194.0 million during the year endedDecember 31, 2019 . Our net cash provided by operating activities has been less than the amount of distributions to our shareholders. Our board of directors takes this and other factors into account as part of any decision to pay a dividend, and the timing and amount of any future dividend is subject to change at the discretion of our board of directors. 50
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We are currently evaluating several potentialInfrastructure and Equipment Leasing transactions, which could occur within the next 12 months. However, as of the date of this filing, none of these pipeline transactions or negotiations are definitive or included within our planned liquidity needs. We cannot assure if or when any such transaction will be consummated or the terms of any such transaction. We have a dividend reinvestment plan in place which allows shareholders to automatically reinvest dividends in our common shares. The plan became effective onFebruary 24, 2017 . Historical Cash Flow The following table presents our historical cash flow: Year Ended December 31, (in thousands) 2019 2018 2017 Cash flow data: Net cash provided by operating activities$ 151,043 $ 133,697 $ 68,497 Net cash used in investing activities (495,236) (703,533)
(472,265)
Net cash provided by financing activities 465,873 597,867
363,078
Comparison of the years endedDecember 31, 2019 and 2018 Net cash provided by operating activities increased$17.3 million primarily due to an increase in net income of$223.5 million and adjustments to reconcile net income which includes (i) an increase in depreciation and amortization of$34.9 million , (ii) a change in current and deferred income taxes of$13.8 million and (iii) a change in fair value of non-hedge derivatives of$10.1 million . These increases were partially offset by (iv) a change in gain on sale of subsidiaries and assets of$276.8 million . Net cash used in investing activities decreased$208.3 million primarily due to (i) proceeds from the sale of subsidiaries of$183.8 million and (ii) an increase in proceeds from the sale of leasing equipment of$204.4 million . These increases were partially offset by (iii) an increase in acquisitions of property, plant and equipment of$101.2 million , (iv) an increase in acquisitions of leasing equipment of$70.6 million and (v) the acquisition of the remaining interest in a JV investment of$28.8 million . Net cash provided by financing activities decreased$132.0 million primarily due to (i) an increase in repayments of debt of$186.3 million , (ii) a decrease in proceeds from the issuance of common shares, net of$147.5 million and (iii) an increase in payment of deferred financing costs of$31.2 million . These decreases were partially offset by (iv) proceeds from the issuance of preferred shares, net of$194.0 million and (v) an increase in proceeds from debt of$37.8 million . Comparison of the years endedDecember 31, 2018 and 2017 Net cash provided by operating activities increased$65.2 million primarily due to an increase in net income of$7.5 million and adjustments to reconcile net income which include increases in (i) depreciation and amortization of$48.2 million , (ii) amortization of lease intangibles and incentives of$18.4 million and (iii) a change in gain on sale of equipment of$14.4 million . These increases were partially offset by security deposits and maintenance claims included in earnings of$6.3 million and a change in fair value of non-hedge derivatives of$4.5 million . Also contributing to the offset were the changes in accounts receivable, other assets, and other liabilities due to the continued expansion of operations across all business segments. Net cash used in investing activities increased$231.3 million primarily due to (i) the acquisition of property, plant and equipment of$113.9 million , (ii) the acquisition of leasing equipment and lease intangibles of$73.5 million in theAviation Leasing segment and (iii) lower proceeds from the sale of leasing equipment and available-for-sale securities of$47.1 million and$30.2 million , respectively. Partially offsetting this increase was a change in cash used for investments of$30.4 million . Net cash provided by financing activities increased$234.8 million primarily due to proceeds from borrowings under (i) the 2025 Notes of$291.0 million , (ii) a net increase in the Revolving Credit Facility of$180.0 million and (iii) the Jefferson Revolver of$49.5 million . Additionally, we received proceeds from the issuance of common shares, net of issuance costs of$147.5 million . Partially offsetting these increases were (i) a net decrease in proceeds from borrowings under the 2022 Notes of$340.2 million and (ii) a net increase in repayments of the Revolving Credit Facility and the CMQR Credit Agreement of$80.0 million and$14.2 million , respectively. Funds Available for Distribution (non-GAAP) We use Funds Available for Distribution ("FAD") in evaluating our ability to meet our stated dividend policy. FAD is not a financial measure in accordance withU.S. generally accepted accounting principles ("GAAP"). The GAAP measure most directly comparable to FAD is net cash provided by operating activities. We believe FAD is a useful metric for investors and analysts for similar purposes. 51
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We define FAD as: net cash provided by operating activities plus principal collections on finance leases, proceeds from sale of assets, and return of capital distributions from unconsolidated entities, less required payments on debt obligations and capital distributions to non-controlling interest, and excluding changes in working capital. The following table sets forth a reconciliation of net cash provided by operating activities to FAD:
Year Ended December 31,
(in thousands) 2019 2018 2017
Net cash provided by operating activities $ 151,043 $ 133,697 $ 68,497
Add: Principal collections on finance leases 13,398 1,981 473
Add: Proceeds from sale of assets 432,273 44,085 121,419
Add: Return of capital distributions from
unconsolidated entities 1,555 2,085 -
Less: Required payments on debt obligations (1) (36,559) (7,793) (8,368)
Less: Capital distributions to non-controlling interest -
- (254)
Exclude: Changes in working capital 4,726 7,610 (4,515)
Funds Available for Distribution (FAD) $ 566,436 _____________________________________________________
(1) Required payments on debt obligations for the year endedDecember 31, 2019 exclude repayments of$350,000 for the Revolving Credit Facility and$18,572 for the CMQR Credit Agreement, and for the year endedDecember 31, 2018 exclude repayments of$175,000 for the Revolving Credit Facility and$36,026 for the CMQR Credit Agreement, and for the year endedDecember 31, 2017 exclude repayments of$100,000 for a certain tern loan,$95,000 for the Revolving Credit Facility and$21,855 for the CMQR Credit Agreement, all of which were voluntary refinancings as repayments of these amounts were not required at such time. Limitations FAD is subject to a number of limitations and assumptions and there can be no assurance that we will generate FAD sufficient to meet our intended dividends. FAD has material limitations as a liquidity measure because such measure excludes items that are required elements of our net cash provided by operating activities as described below. FAD should not be considered in isolation nor as a substitute for analysis of our results of operations under GAAP, and it is not the only metric that should be considered in evaluating our ability to meet our stated dividend policy. Specifically: •FAD does not include equity capital called from our existing limited partners, proceeds from any debt issuance or future equity offering, historical cash and cash equivalents and expected investments in our operations. •FAD does not give pro forma effect to prior acquisitions, certain of which cannot be quantified. •While FAD reflects the cash inflows from sale of certain assets, FAD does not reflect the cash outflows to acquire assets as we rely on alternative sources of liquidity to fund such purchases. •FAD does not reflect expenditures related to capital expenditures, acquisitions and other investments as we have multiple sources of liquidity and intend to fund these expenditures with future incurrences of indebtedness, additional capital contributions and/or future issuances of equity. •FAD does not reflect any maintenance capital expenditures necessary to maintain the same level of cash generation from our capital investments. •FAD does not reflect changes in working capital balances as management believes that changes in working capital are primarily driven by short term timing differences, which are not meaningful to our distribution decisions. •Management has significant discretion to make distributions, and we are not bound by any contractual provision that requires us to use cash for distributions. If such factors were included in FAD, there can be no assurance that the results would be consistent with our presentation of FAD. Debt Obligations See Note 8 to the Consolidated Financial Statements for information related to our debt obligations. 52
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Contractual Obligations The following table summarizes our future obligations, by period due, as ofDecember 31, 2019 , under our various contractual obligations and commitments. We had no off-balance sheet arrangements as ofDecember 31, 2019 . Payments Due by Period (in thousands) Total 2020 2021 2022 2023 2024
Thereafter
FTAI Pride Credit Agreement
- $ - $ - $ - $ -
Jefferson Revolver (1) 50,000 - 50,000 - - - -
DRP Revolver 25,000 - 25,000 - - - -
Revolving Credit Facility - - - - - - -
Series 2012 Bonds (1) 39,550 1,810 1,960 2,120 2,295 2,485 28,880
Series 2016 Bonds (1) 144,200 144,200 - - - - -
Senior Notes due 2022 700,000 - - 700,000 - - -
Senior Notes due 2025 450,000 - - - - - 450,000
Total principal payments on
loans and bonds payable 1,444,759 182,019 76,960 702,120 2,295 2,485 478,880
Total estimated interest
payments (2) 302,915 85,304 80,427 41,958 31,932 31,735 31,559
Operating lease obligations 121,848 3,308 3,379 3,250 3,194 2,963 105,754
424,763 88,612 83,806 45,208 35,126 34,698 137,313
Total contractual obligations
______________________________________________________________________________________
(1) InFebruary 2020 , we refinanced the Series 2012 Bonds and Series 2016 Bonds which extended the earliest maturity date to 2025 and also paid off the Jefferson Revolver. See Note 21 to the consolidated financial statements for additional details. (2) Estimated interest payments based on rates as ofDecember 31, 2019 . We expect to meet our future short-term liquidity requirements through cash on hand and net cash provided by our current operations. We expect that our operating subsidiaries will generate sufficient cash flow to cover operating expenses and the payment of principal and interest on our indebtedness as they become due. We may elect to meet certain long-term liquidity requirements or to continue to pursue strategic opportunities through utilizing cash on hand, cash generated from our current operations and the issuance of securities in the future. Management believes adequate capital and borrowings are available from various sources to fund our commitments to the extent required. Application of Critical Accounting Policies Operating Leases-We lease equipment pursuant to net operating leases. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the lease, assuming no renewals. Revenue is not recognized when collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash payments are received. Generally, under our aircraft lease and engine agreements, the lessee is required to make periodic maintenance payments calculated based on the lessee's utilization of the leased asset. Typically, under our aircraft lease agreements, the lessee is responsible for maintenance, repairs and other operating expenses throughout the term of the lease. These periodic maintenance payments accumulate over the term of the lease to fund major maintenance events, and we are contractually obligated to return maintenance payments to the lessee up to the amount paid by the lessee. In the event the total cost of maintenance events over the term of a lease is less than the cumulative maintenance payments, we are not required to return any unused or excess maintenance payments to the lessee. Maintenance payments received for which we expect to repay to the lessee are presented as Maintenance Deposits in our Consolidated Balance Sheets. All excess maintenance payments received that we do not expect to repay to the lessee are recorded as Maintenance revenues. Estimates in recognizing revenue include mean time between removal, projected costs for engine maintenance and forecasted utilization of aircraft which are affected by historical usage patterns and overall industry, market and economic conditions. Significant changes to these estimates could have a material effect on the amount of revenue recognized in the period. 53
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Finance Leases-From time to time we enter into finance lease arrangements that
include a lessee obligation to purchase the leased equipment at the end of the
lease term, include a bargain purchase option, or provides for minimum lease
payments with a present value of 90% or more of the fair value of the leased
equipment at the date of lease inception. Net investment in finance lease
represents the minimum lease payments due from lessee, net of unearned income.
The lease payments are segregated into principal and interest components similar
to a loan. Unearned income is recognized on an effective interest method over
the lease term and is recorded as finance lease income. The principal component
of the lease payment is reflected as a reduction to the net investment in
finance leases.
Variable Interest Entities-The assessment of whether an entity is a VIE and the
determination of whether to consolidate a VIE requires judgment. VIEs are
defined as entities in which equity investors do not have the characteristics of
a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. A VIE is required to be consolidated by its primary
beneficiary, and only by its primary beneficiary, which is defined as the party
who has the power to direct the activities of a VIE that most significantly
impact its economic performance and who has the obligation to absorb losses or
the right to receive benefits from the VIE that could potentially be significant
to the VIE.
Maintenance Payments-Typically, under an operating lease of aircraft, the lessee
is responsible for performing all maintenance and is generally required to make
maintenance payments to us for heavy maintenance, overhaul or replacement of
certain high-value components of the aircraft or engine. These maintenance
payments are based on hours or cycles of utilization or on calendar time,
depending on the component, and are generally required to be made monthly in
arrears. If a lessee is making monthly maintenance payments, we would typically
be obligated to reimburse the lessee for costs they incur for heavy maintenance,
overhaul or replacement of certain high-value components to the extent of
maintenance payments received in respect of the specific maintenance event,
usually shortly following the completion of the relevant work.
We record the portion of maintenance payments paid by the lessee that are
expected to be reimbursed as maintenance deposit liabilities on the Consolidated
Balance Sheet. Reimbursements made to the lessee upon the receipt of evidence of
qualifying maintenance work are recorded against the maintenance deposit
liability.
In certain leases, we or the lessee may be obligated to make a payment to the
other party at lease termination based on redelivery conditions stipulated at
the inception of the lease. When the lessee is required to return the aircraft
in an improved maintenance condition, we record a maintenance right asset, as a
component of other assets, for the estimated value of the end-of-life
maintenance payment at acquisition. We recognize payments received as
end-of-lease compensation adjustments, within lease revenue or as a reduction to
the maintenance right asset, when payment is received or collectability is
assured. In the event we are required to make payments at the end of the lease
for redelivery conditions, amounts are accrued as additional maintenance
liability when we are obligated and can reasonably estimate such payment.
Property, Plant and Equipment, Leasing Equipment and Depreciation-Property,
plant and equipment and leasing equipment are stated at cost (inclusive of
capitalized acquisition costs, where applicable) and depreciated using the
straight-line method, over estimated useful lives, to estimated residual values
which are summarized as follows:
Range of Estimated Useful
Asset Lives Residual Value Estimates
Aircraft 25 years from date of Generally not to exceed 15% of
manufacture manufacturer's list price when new
Aircraft engines 2 - 6 years, based on Sum of engine core salvage value
maintenance adjusted service plus the estimated fair value of
life life limited parts
Offshore energy vessels 25 years from date of 10% of new build cost
manufacture
Railcars 40 - 50 years from date of Scrap value at end of useful life
manufacture
Track and track related assets 15 - 50 years from date of Scrap value at end of useful life
manufacture
Buildings and site improvements 20 - 30 years Scrap value at end of useful life
Railroad equipment 3 - 15 years from date of Scrap value at end of useful life
manufacture
Terminal machinery and equipment 15 - 25 years from date of Scrap value at end of useful life
manufacture
Vehicles 5 - 7 years from date of Scrap value at end of useful life
manufacture
Furniture and fixtures 3 - 6 years from date of None
purchase
Computer hardware and software 3 - 5 years from date of None
purchase
Impairment of Long-Lived Assets-We perform a recoverability assessment of each
of our long-lived assets whenever events or changes in circumstances, or
indicators, indicate that the carrying amount or net book value of an asset may
not be recoverable. Indicators may include, but are not limited to, a
significant lease restructuring or early lease termination; significant traffic
decline; or the introduction of newer technology aircraft, vessels, engines or
railcars. When performing a recoverability assessment, we measure whether the
estimated future undiscounted net cash flows expected to be generated by the
asset exceeds its net book value. The undiscounted cash flows consist of cash
flows from currently contracted leases and terminal services contracts, future
projected leases, terminal service and freight rail rates, transition costs,
estimated down time and estimated residual or scrap values. In the event that an
asset does not meet the recoverability test, the carrying value of the asset
will be adjusted to fair value resulting in an impairment charge.
54
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Management develops the assumptions used in the recoverability analysis based on its knowledge of active contracts, current and future expectations of the global demand for a particular asset and historical experience in the leasing markets, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, terminal service, and freight rail rates, residual values, economic conditions, technology, demand for a particular asset type and other factors. With respect to our offshore segment, although we expect current market conditions to improve, if such conditions persist for an extended period of time, this could result in the impairment of some of our offshore vessels. Goodwill-Goodwill includes the excess of the purchase price over the fair value of the net tangible and intangible assets associated with the acquisition ofJefferson Terminal . The carrying amount of goodwill was approximately$122.6 million and$116.0 million as ofDecember 31, 2019 and 2018, respectively. The increase relates to our purchase of the remaining 50% interest inJGP Energy Partners LLC . See Note 7 to the consolidated financial statements for additional details. We review the carrying values of goodwill at least annually to assess impairment since these assets are not amortized. An annual impairment review is conducted as ofOctober 1st of each year. Additionally, we review the carrying value of goodwill whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The determination of fair value involves significant management judgment. For an annual goodwill impairment assessment, an optional qualitative analysis may be performed. If the option is not elected or if it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step goodwill impairment test is performed to identify potential goodwill impairment and measure an impairment loss. A qualitative analysis was not elected for the years endedDecember 31, 2019 or 2018. The first step of an impairment assessment compares the fair value of a respective reporting unit with its carrying amount, including goodwill. The estimate of fair value of the respective reporting unit is based on the best information available as of the date of assessment, which primarily incorporates certain factors including our assumptions about operating results, business plans, income projections, anticipated future cash flows and market data. If the estimated fair value of the reporting unit is less than the carrying amount, a second step must be completed in order to determine the amount of goodwill impairment that should be recorded, if any. We estimate the fair value of the reporting units using an income approach, specifically a discounted cash flow analysis. This analysis requires us to make significant assumptions and estimates about the extent and timing of future cash flows (including forecasted revenue growth rates and EBITDA margins), capital expenditures and discount rates. The estimates and assumptions used consider historical performance if indicative of future performance, and are consistent with the assumptions used in determining future profit plans for the reporting units. We also utilize market valuation models and other financial ratios, which require us to make certain assumptions and estimates regarding the applicability of those models to our assets and businesses. Although we believe the estimates of fair value are reasonable, the determination of certain valuation inputs is subject to management's judgment. Changes in these inputs, including as a result of events beyond our control, could materially affect the results of the impairment review. If the forecasted cash flows of theJefferson Terminal and Railroad reporting units or other key inputs are negatively revised in the future, the estimated fair value of theJefferson Terminal and Railroad reporting units could be adversely impacted, potentially leading to an impairment in the future that could materially affect our operating results. Specifically, as it relates to theJefferson Terminal segment, forecasted revenue is dependent on the ramp up of volumes under current contracts and the acquisition of additional storage contracts for the heavy and light crude and refined products during 2020 subject to obtaining rail capacity for crude, permits for pipeline and movements in future oil spreads.Jefferson Terminal was designed to reach a storage capacity of 21.7 million barrels, and 4.4 million of storage, or approximately 20.3% of capacity, is currently operational. If the Company strategy changes from planned capacity downward due to an inability to source contracts or expand volumes, the fair value of the reporting units would be negatively affected, which could lead to an impairment. The expansion of refineries in the Beaumont/Port Arthur area, as well as growing crude oil production in theU.S. andCanada , are expected to result in increased demand for storage on theU.S. Gulf Coast . Other assumptions utilized in our annual impairment analysis that are significant in determination of the fair value of the reporting unit include the discount rate utilized in our discounted cash flow analysis of 13.5% and our terminal growth rate of 2%. Furthermore, development of both inbound and outbound pipelines to and from theJefferson Terminal over the next year to two to years will affect our forecasted growth and therefore our estimated fair value. We continue to expect theJefferson Terminal segment to generate positive Adjusted EBITDA during 2020. Although certain of our anticipated contracts or expected volumes from existing contracts forJefferson Terminal have been delayed, we continue to believe our projected revenues are achievable and have not yet modified those projections based on ongoing negotiations with our customers and discussions with major pipeline companies. Further delays in executing these contracts or achieving our projections could adversely affect the fair value of the reporting unit. However, strengthening macroeconomic conditions such as increased oil prices and the increasing spread between Western Canadian Crude andWestern Texas Intermediate are better than we anticipated, and we remain positive for the outlook ofJefferson Terminal's earnings potential. For the years endedDecember 31, 2019 , 2018, and 2017 there was no impairment of goodwill. Income Taxes-A portion of our income earned by our corporate subsidiaries is subject toU.S. federal and state income taxation, taxed at prevailing rates. The remainder of our income is allocated directly to our partners and is not subject to a corporate level of taxation. Certain subsidiaries of ours are subject to income tax in the foreign countries in which they conduct business. 55
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We account for these taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established when management believes it is more likely than not that a deferred tax asset will not be realized. Recent Accounting Pronouncements Please see Note 2 to our consolidated financial statements included elsewhere in this filing for recent accounting pronouncements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Market risk represents the risk of changes in value of a financial instrument, caused by fluctuations in interest rates and foreign exchange rates. Changes in these factors could cause fluctuations in our results of operations and cash flows. We are exposed to the market risks described below. Interest Rate Risk Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. Interest rate risk is highly sensitive to many factors, including theU.S. government's monetary and tax policies, global economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposure relates to our term loan arrangements. Our borrowing agreements generally require payments based on a variable interest rate index, such as LIBOR. Therefore, to the extent our borrowing costs are not fixed, increases in interest rates may reduce our net income by increasing the cost of our debt without any corresponding increase in rents or cash flow from our finance leases. We manage our exposure to interest rate movements through the use of interest rate derivatives (interest rate swaps and caps). As a result, when market rates of interest change, there is generally not a material impact on our interest expense, future earnings or cash flows. The following discussion about the potential effects of changes in interest rates is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our financial condition and results of operations. Although we believe a sensitivity analysis provides the most meaningful analysis permitted by the rules and regulations of theSEC , it is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled. Although the following results of a sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward-looking disclosure also is selective in nature and addresses only the potential interest expense impacts on our financial instruments and, in particular, does not address the mark-to-market impact on our interest rate derivatives. It also does not include a variety of other potential factors that could affect our business as a result of changes in interest rates. As ofDecember 31, 2019 , assuming we do not hedge our exposure to interest rate fluctuations related to our outstanding floating rate debt, a hypothetical 100-basis point increase/decrease in our variable interest rate on our borrowings would result in an interest expense increase/decrease of approximately$1.0 million over the next 12 months. 56
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