New Fortress Energy Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 14 speakers on the call.

Operator

Good day, everyone, and welcome to the NFV Second Quarter 2023 Earnings Conference Call. Today's conference is being recorded and all To get us started today with opening remarks and introductions, I am pleased to turn the floor to Managing Director of Strategy and Investor Relations, Mr. Chance Cifatone. Please go ahead, sir.

Speaker 1

Participants will be recorded. Perfect. Thank you, Jim, and good morning, everyone. Thank you for joining today's conference call, where we will discuss our Q2 2023 results, recent developments, participants are in the line with the operator and the operator to discuss the financial results. As Jim mentioned, the call is being recorded and will be available for replay on the Investors section of our website under the subheading Events and Presentations.

Speaker 1

In the same location, you will find a press release regarding our Q2 2023 results and the corresponding presentation that we will walk through on today's call. As we proceed through the discussion, we will be referring to that presentation. In that same presentation, you will also find a series of important disclosures related to forward looking statements and non GAAP financial measures. Participants to review these important disclosures in addition to the description of risk factors contained within our SEC filings. Now let's dive into the call.

Speaker 1

My name is again, Chance Pipitone, and joining me today at New Fortress Energy are Wes Edens, our Chairman and Chief Executive Officer Chris Giunta, our CFO Andrew Dede, our Managing Director of New Business and other managers of our senior leadership team. Wes, over to you.

Speaker 2

Great. Nice chance and welcome everybody. Lots to talk about today. So let's start with Page number 3 participants will go from there. Quarter results for the quarter were solid.

Speaker 2

The EBITDA for the quarter $246,000,000 participants are down from the Q1. Virtually 100% of that is just a function of the geography of timing of some cargo sales. The core earnings were basically flat quarter over quarter. Compared to the first half of last year, we're up significantly, so $541,000,000 last year in the first half, $686,000,000 in this year. Perhaps more importantly, the guidance that we see now for the rest of the year, dollars 1,600,000,000 for 2023 $2,400,000,000 in 2024, a little bit of reduction of guidance for this year just as a function of a few of the projects delivering participants.

Speaker 2

This is a very, very interesting page in the beginning of the presentation. So to say the least, these are very exciting times for the company. Participants. After many years of hard work and many billions invested, we now have 5 major infrastructure projects, all delivering essentially at the same time. Having $3,200,000,000 invested in projects that turn into productive revenue producing assets is life changing for the company and there's a couple of material points here.

Speaker 2

1, participants greatly increases our revenue potential as a company. Obviously, you're converting construction projects into revenue producing assets and that's obviously a huge, huge change. 2 is it changes the nature of our company from one that is a mix today of about 50% of our revenues coming from merchant sales participants to one that's virtually all customer sales going forward. That greatly improves both the quality and reliability and transparency of our earnings going forward. You're going to see that manifest itself post the second half of this year and then going on into the future.

Speaker 2

3, it opens up a number of new markets to us, huge markets with tremendous potential. I'll kind of I'll click through the major ones now. Puerto Rico, which is already a market for us, but is now much, much larger with The acquisition of the PREPA fleet, Panera, the temporary projects we've done there, participants will talk about that in detail. But as we will explain, this is a massive, massive opportunity for the company. Number 2, Brazil, 2 large terminals coming online that greatly increased our capacity as a company, increasing total capacity of throughput by nearly 35%.

Speaker 2

Participants are in the range

Speaker 3

of $1,000,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in

Speaker 2

the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the are in the quarter and we believe we're finally very close to being the 1st and only LNG terminal in the country. All these together are increasing our capacity to grow materially and most importantly without material amounts of additional CapEx. This is truly the apex of our capital spend and we now need to just operate and grow revenues with very little in additional capital spend. Participants. It's an amazing moment for us as a company in the next 30 to 60 days.

Speaker 2

It will be transformational to us. It is all made possible with the hard work and dedication of literally thousands of people that have made this happen. Just a little context to appreciate how big $3,200,000,000 in infrastructure actually is. Participants. A few years ago, another line of work, we built an arena in Milwaukee for our bucks.

Speaker 2

Amazing arena. I'm a little biased, but my view is it's the best in league. That was a total of $525,000,000 in CapEx. It took us about 2.5 years to build. What we're doing here at NFE is the equivalent of building and deliver are in the same time in countries throughout the world, which if it sounds hard, it's because it's plenty hard.

Speaker 2

It's hard to identify markets. It's hard to get a commercial foothold and get in business and it's very hard to fund and then of course it's hard to execute. That said, nothing that we're doing here is unproven or dangerous or participants are in the same form, it's all been done before and in many cases many, many times around the world, which is what makes doing at the same time both reasonable and feasible if you're organized and dedicated, participants These are big construction projects, so there's things to talk about every day and we do, but all on track and once we're done, we'll truly transform the company. Participants will produce significant reliable cash flows going forward, require very little CapEx and so does the cash flow much of it will go straight to the bottom line and deleverage and reduce Debt of the company. It's now a very straight shot for us to become an investment grade company in the not so distant future.

Speaker 2

New markets With major avenues to grow essential infrastructure at exactly the right time. So Page number 5. Participants These are a list of the projects. So there's FLNG 1, which Chris Guinta will talk about, the liquefier, which is in the process of being deployed as we speak, is materially complete. Puerto Rico Power, half of which is operational, the other half will be operational in the next few weeks that Brandon will talk about.

Speaker 2

Baqueria and Saeta Cana Arena are 2 terminals in Brazil that Andrew Didi will talk about and last La Paz Power Plant, 135 Megawatt Plant that is being commissioned as we go right now. $3,200,000,000 in infrastructure being converted from construction to revenue producing, which has a significant impact on the company. Page 6 is perhaps my favorite page of the entire presentation because it shows the history of the company. What you see here on this page is the number of terminals in yellow Going from 1 in 2016 to 3 in 2020 to 5 here in 2023 and 7 in 2024. Participants.

Speaker 2

The capacity that each one of those has is then listed below. Just as a point of reference, we showed 20 TBtu's, 1,000,000 tons of LNG is 50. So this was we started our business in Montego Bay with basically 40% of 1 ton of capacity. We have grown that materially as these different markets have come online to 620 TBtu of capacity today, 920 next year. Participants.

Speaker 2

As you'd expect, LNG volumes then through these terminals then follow. So 8 TBTUs in 2017, participants are in 2020 1, 136 this year, 185 and substantial growth beyond that going forward. And lastly, of course, you'd expect that to convert to EBITDA. We look at the bottom line, it's truly remarkable progression of EBITDA from losing money as we're developing assets obviously to a place where we're essentially breaking even in 2020 to one which has gone from $33,000,000 in 2020 $605,000,000 in 2021 $1,100,000,000 in 2022 $1,600,000,000 this year participants are in the line of the call. So truly a remarkable path.

Speaker 2

With that, let me turn it over to Chris to talk about our FONG1. Great.

Speaker 4

Please turn to Slide number 8, when we provide some added details on the completion of BaaS LNG 1. So as mentioned, thanks to the incredible effort by our team in Corpus Christi and in Mexico, we continue to make major progress and we're nearing our goal of COD by the end of this quarter. Participants. At this point, each of the rigs have achieved mechanical completion and we're in the process of commissioning various systems while the remaining rigs are still in the Kiewit Shipyard. As a reminder, FLNG is comprised of 3 specific rigs with the names Pioneer 1, 23.

Speaker 4

Pioneer 1 is the gas processing module. This is connected to the Subsea riser and it dehydrates and prepares the gas for liquefaction. This unit is expected to mobilize and be installed around August 23. Pioneer 2 is the liquefaction module that includes the Chart ColdBox and Baker Hughes Compressor, which together changed the vapor into LNG. This unit is expected to mobilize and be installed around August 28.

Speaker 4

Pioneer 3 houses the accommodations, power and electrical control hub and this is the unit that has already been mobilized and installed offshore. From a marine construction standpoint, all activities have been completed, including the installation of the hot tap assembly on on the Sur de Tejas pipeline, a 3 kilometer pipeline lateral to our FLNG asset and the anchor mooring installation for our storage vessel. Participants. In addition, our floating storage vessel, the Penguin, has completed all of its make ready activities and currently in transit to Altamira, where it will clear in and hook up to its installed moorings later this month. Participants.

Speaker 4

The next step is to sell units P1 and P2 over the next couple of weeks to their location offshore and then we expect to introduce first gas in September and sell our first cargo in are in the range of 2023. As we've discussed before, the NFP time line is organized with much greater focus on speed to market that prosecutes the various stages participants in parallel path as opposed to traditional projects that follow a much more linear model. When looking at additional FLNG units, given that we've already done all the engineering and design, we believe future modules will be completed in around 18 months. This is what allows us to deploy FLNG 2 and 3 modules in the second half of next year. Participants.

Speaker 4

While the cost of our FONG G1 will come in just shy of around $900 a tonne, the future cost of modules and on store installation per balance of plant is expected to be roughly $6.50 a ton. If you turn to Slide number 9, this is really intended to evidence the value of the strategy that we've employed. Participants. Our decision to build the units while we're still completing engineering did lead to inefficiencies. However, the resulting benefits far outweigh the challenges we incurred on FLNG 1.

Speaker 4

Participants. Moving down the slide, there are really two primary reasons why we feel that adding FLNG into our supply portfolio poses outsized value. Participants. First, the value of LNG now means that you'll effectively own the FLNG asset for free well ahead of when any competitive supply could come online. Participants.

Speaker 4

The graph on the left side of this page demonstrates what I'm alluding to here. We believe that no other LNG project with available capacity will come online before 2027. Participants. And if you assume 3 years at 70 TBtu's per year, that's 210 TBtu's available for sale. The difference between a traditional LNG supply agreement of 100 and participants.

Speaker 4

If you multiply that by our 210 TBtu's, you get approximately $1,500,000,000 in proceeds in the time between our COD and when a competing project is online. The The second point of having our own LNG supply is that it provides greater operational flexibility to serve our customers. Remember, when you have long term SPAs, participants are in the range of the 2nd quarter. You're locked into loading schedules over a year in advance, which provides very little latitude when you're running a global downstream regas business. Participants.

Speaker 4

Further, you risk curtailments in the wake of operational issues by the supplier that could lead to knock on impacts in our supply chain. As a result, having our own FLNG supply that can serve as participants to our core portfolio of offtake agreements is the best way to be prepared to satisfy all of our customer needs. With that, I'll hand the call over to Andrew to talk about

Speaker 5

participants. Thanks, Chris. Good morning, everyone. I'm on Page 11, and I've got 3 slides here that are going to dig in a little bit more on what Wes participants went through on Slide 6 around capacity in our terminals. So Slide 11 shows how we calculate the capacity of an LNG terminal at FE.

Speaker 5

Participants. We're going to take the example of Montego Bay, which is our first terminal. So Q4 2016 COD. Mobe is 8,000 cubic meters of landed storage, so onshore storage. And then we have an LNG vessel there.

Speaker 5

In the picture, you can see both, the bullet tanks in the left part of the picture and then the ship coming alongside. Mobe is serving Jamaica Public Service, JPS on a long term contract for gas

Speaker 3

participants are part of the Bogue power

Speaker 2

plant and it's also

Speaker 5

our main small scale hub in Jamaica. So we serve over 20 industrial and hospitality customers participants from the Montego Bay Terminal mostly through truck loading. On the right side is how we calculate capacity. So we do is we take our 8,000 cubic meters of storage and we Assume 2 reloads a week. That's not really conservative nor is it too aggressive.

Speaker 5

That's right at about kind of a comfortable pace for our refilling. Participants. And then we take that 16,000 cubic meters a week times 52 weeks of the year, we get to 832,000 cubic meters a year. Participants. We convert by multiplying by 24 into TBtu's and we have a capacity of 24 TBtu's.

Speaker 5

So I'll flip the end to Page 12, Which basically takes that rubric and shows it across the portfolio on the left side. So these are all of our operating terminals, which for year end 2024. So Puerto Rico Upsize, Barcarena in Brazil, Santa Catarina in Brazil and Nicaragua, all which can get us to a total number of 920 TBtu are using the rule of thumb of 50 TBtu is equals 1 ton, participants are in the range of $1,000,000 of re gas capacity in our portfolio. So that's a greater than 100% increase between now year end 2024 and the utilization numbers on the right show how our LNG volumes track through those terminals. So by the end of 'twenty four, we'll have a portfolio of about 3.6 MTPA of LNG participants are going through a regas portfolio of about 18 MTPA of regas.

Speaker 5

So that's just about a 20% utilization rate participants there in the yellow box on the right side. Page 13 walks through a little bit of how we see growth coming from these increases in capacity. Participants So two main ways in which NFE will grow from here. The first is increased utilization in our current terminals and the second is to enter new markets and continue to grow as we have in the past. Participants.

Speaker 5

There's a few reasons why we think increasing utilization and organic growth is extremely advantageous for NFV. First, participants call out that the current terminal utilization is relatively modest, so at about 20%, we have a lot of room for growth both operationally and commercially. This organic growth has highly accretive margins. So in our case, not only have we paid for the infrastructure, so this growth doesn't have any incremental CapEx, But it also has very, very low incremental OpEx because typically we are already paying for the FSRU and the onshore terminal operations. So the margins and any new customers or new volumes that we push at the terminal are accretive to what we currently have.

Speaker 5

And then third is the embedded position we have in these growth markets. Brandon is going to go through the example of Puerto Rico, which is really a crown jewel in our portfolio at the moment and the sort of development position and the growth that we see over the next few years. That's going to continue to happen in the rest of our portfolio as we grow with Puerto Rico being a great example for how we see that happening. On the right side, participants will continue to also develop new terminal infrastructure. So in addition to the opportunities we have in Brazil and Ireland, we're also looking at opportunities in the Caribbean and Central America, where we've participants and then also South Africa and Vietnam, which both represent high growth, high population markets that are exciting for LNG.

Speaker 5

Participants We typically target a return on invested capital of over 20% on these terminals. So they're relatively capital light relative to their opportunity commercially. And then we want to call it portfolio value we see and continuing to grow terminal capacity. So as Wes walked through, 1 terminal going to 7, LNG capacity of 20 TBtu is going to 9 20. This unlocks tremendous opportunities for organic growth across the portfolio and across time.

Speaker 5

And then that increasing scale and diversity of cash flows makes NFV a much better business as we go. I'll turn it over to Brandon now.

Speaker 6

Thanks, Andrew, and good morning. Thank you all for joining. As Wes mentioned at the beginning of the call, we've been investing in Puerto Rico since 2017, so I'll refer to you to Slide 15. And just a little bit of context, Puerto Rico is a U. S.

Speaker 6

Commonwealth with 3,500,000 people with amazing culture and history. Participants imports over 20,000,000 barrels of HFO and diesel a year to generate power, which is highly unusual compared to the U. S. Mainland. Participants.

Speaker 6

In addition, it has a stated goal of being 100% renewable by 2,050. The power generation that exists today is old, participants are ready to move to natural gas and away from distillates in support of increased integration renewables over time. NFV's involvement in Puerto Rico started in 2017. In September 2017, Hurricane Maria, a Category 5 hurricane struck the island participants severely damaged the electrical grid. Like others, NFV responded to the call to rebuild and opened its LNG terminal in 2020 participants are in record time for a facility of that type across the world.

Speaker 6

The terminal supported 300 megawatts of the island's most efficient and low emission dispatchable power and significantly has generated 1,000,000 of dollars of accelerate both the reconstruction of the power grid and the deployment of renewables. I move to Page 16. Participants in 2021, PREPA privatization got underway. PREPA is the largest publicly owned utility in the U. S.

Speaker 6

Participants with 1.5 customers, dollars 4,500,000,000 operating budget, 20,000 miles of T and D and 5 gigawatts of generation across 17 sites. Have significant underinvestment there that has led to the least reliable and most expensive electrical system in the U. S. To put it in context, Someone in Puerto Rico is 630 times more likely to lose power than someone in the Mainland. Government has decided that PREPA needed to be privatized to better use reconstruction funds and accelerate the energy transition.

Speaker 6

In 2017, the government of Puerto Rico launched a privatization process. In 2021, participants. The government privatized the transmission distribution system with a private owner. The same year, NFE decided to compete participants for privatization. In 2022, it took over it won the privatization mandate for Generation.

Speaker 6

And in July of 2023 of this year, it took over the generation system under the name Henera, which is an NFE company. Participants. Today, NFV manages over 83% of the generation system, which is about 5 gigawatts, 700 people, $3,000,000,000 operating budget including fuel and 1,000,000,000 of dollars of reconstruction funds to rebuild the generation system. Our mandate is simple, improve reliability and lower cost. I move to Page 17.

Speaker 6

The U. S. Government is very focused on creating a clean and resilient power grid in Puerto Rico. The federal government and all of its agencies in coordination with are investing $20,000,000,000 to rebuild the power grid that will lead to a 0 carbon reliable efficient system, participants, which we expect to be a model for the Mainland and the world. The system still requires dispatchable power that can serve the peak demand, which would include participants are now in the range of 2.5 times.

Speaker 6

The result we expect to be a model for how other systems are done. Participants. On Page 18, I focus on the current event that we are working on in Puerto Rico. In late 2022, in the wake of Hurricane Fiona, FEMA called for 3 50 Megawatts of emergency power to stabilize the grid. FEMA launched a process to acquire and bring in 3 50 Megawatts participants will be able to access the power generation units and gas for up to 2 years to provide grid stabilizing power.

Speaker 6

NFIE responded to this call by deploying assets and expertise. Participants. It installed 7 units at Palaseco in 60 days, turning on in the beginning of July and is in the process of completing the installation participants have an additional 200 megawatts at San Juan, where our existing terminal is and we expect that to be completed in the next several weeks. Participants. To give you context for such a fast deployment, NFE brought its experience across the entire portfolio and the developments that we have done to date.

Speaker 6

Participants. Our team installed turbines, emissions controls, substations and other high voltage electric gear, a lot of balance participants are in a clean and sustainable way. NFE used all the skills and installed the 3 50 megawatts in record time. This is the fastest project ever accomplished by FEMA of this type in the world. I move to Page 18.

Speaker 6

There are several ways that NFE can help Puerto Rico and the U. S. Government reach their goals. Participants. Number 1, provide the island with short term power to fill immediate need for megawatts, which is capacity now.

Speaker 6

The best example would be the 3 50 megawatts that is currently being installed and the additional megawatts that are contemplated to increase this installation participants over the next several months. Number 2, supply any conversions of existing diesel and oil power plants participants will be able to transition away from expensive and carbon intensive distillate fuels and better position the power system participants should support renewables. A great example of this would be continuing to support diesel and HFO where possible, which is about 2.5 gigawatts participants have additional installed plant today that is capable of being converted. Number 3, participate in any long term power solution. Participants.

Speaker 6

The island will be transitioning to renewables over the next several decades, but still must maintain the installed plant to supply over 3.7 gigawatts participants will be in the range of 20 5 percent of the island's mainland is in the San Juan metro area where our terminal is, which perfectly positions us participants are ready to expand and accelerate that goal. The goals are to facilitate the U. S. Government's commitment to invest over $20,000,000,000 to rebuild the power grid that will lead to a 0 carbon reliable efficient system, which again will be a model for how this area and others around the world similar situation will do it. The in state we expect in Puerto Rico will be renewable power supported by affordable dispatchable power that will be fueled by gas, hydrogen and supported by energy storage.

Speaker 6

Through NFE and Genera, we want to accelerate that transition with high quality infrastructure that best supports the integration and operation of renewables. Puerto Rico is a great transition example for us and one that we believe we could model in other areas. We believe it can be replicated around the world as others seek to accelerate the same energy transition. And with that, I turn it over to Chris.

Speaker 4

Thanks, Brandon. Please turn to Slide 21. I'll turn the financial participants for the Q1 excuse me, Q2 of 2023. During Q2, we had $561,000,000 in revenue and $246,000,000 of adjusted EBITDA, which participants combined with Q1 had a $686,000,000 of adjusted EBITDA for the first half of twenty twenty three. Segment operating margin was 239,000,000 are available for the Ship segment.

Speaker 4

You can find more detail in the appendix. The net income for the quarter was $120,000,000 participants are in the range of $0.58 per share on a diluted basis. This quarter we sold 25 TBtu in total volumes, Which equates to an average EBITDA margin of around $10 per MMBtu. As Wes mentioned, the primary driver participants. The change in EBITDA during Q2 as opposed to Q1 is the cargo sales, which accounts for about $195,000,000 or 95% of the decrease quarter over quarter.

Speaker 4

On a go forward basis from an earnings perspective, we are replacing most of the cargo sale earnings with volumes being sold to downstream customers contracted sales through our terminals, which will be around 60% of 2023 adjusted EBITDA to over 85% of 2024 adjusted EBITDA. Participants. And just to point out, the average contracted term is around 12 years with over 80% of these sales being to investment grade counterparties. Participants. This is the long term predictable net spread business that we've been building toward.

Speaker 4

And finally, a quick comment here on the balance sheet. Since the end of June, we've closed on another $500,000,000 financing, which includes an incremental $100,000,000 in the turbine financing, bringing us to $200,000,000 in total and $400,000,000 term loan that will be taken out with an asset level financing participants are in

Speaker 3

line with the SEC.

Speaker 4

And just to note, historically, the company has funded our growth by choosing to finance our development projects on balance sheet. And then once the assets are operational, participants can back lever them on a discrete standalone asset basis. This is a trend we will continue to execute. With that, I'll turn the call back over to

Speaker 3

Chance. Participants.

Speaker 1

Yes. Thank you, Chris. Let's turn it back to the operator. I'd love to open up the lines for some questions. Absolutely.

Operator

Thank you, gentlemen. And to our phone audience will hear first from Chris Robertson at Deutsche Bank.

Speaker 7

Hey, good morning guys. Thanks for taking the time to take our participants today. Just wanted to circle back on the CapEx guidance for 2024 here, especially with regards to FLNG 23 as those are currently under construction. Participants. Maybe this is a question for Chris.

Speaker 7

Can you walk through the latest CapEx guidance participants And talk about the financing of those

Speaker 5

2 next year. So I'm

Speaker 7

just trying to get to why has CapEx participants guidance come down so much in 2024 compared to last

Speaker 8

update when these two units are still under construction? Thanks.

Speaker 4

Yes. So great question, Chris. I mean fundamentally, we've invested over 35% of the cost of FLNG 2 and 3 already using equity. So the view is that we should be able to borrow debt against the assets to fund the remaining CapEx plans. Participants And then we also have, from a terminal CapEx standpoint, we've almost completed all of the spend for participants.

Speaker 4

For Baccarat and Santa Catarina, Nicaragua, that's all less than $100,000,000 remaining. And then you have on a go forward basis only around $50,000,000 a year

Speaker 3

participants.

Speaker 4

We have about $50,000,000 a year for maintenance CapEx on the terminals. Just circling back to the top of your question, we funded $1,300,000,000 already against FLNG number 1. So there's very modest cost remaining this year

Speaker 7

On FLNG 23, you said that you've already invested over 35% in those 2?

Speaker 4

That's right.

Speaker 2

Yes, maybe just to amplify a little bit. I mean, one of the aspects of the business when you're constructing, we're financing assets on balance sheet. Participants. When they are constructed and producing cash flows, you can then go pursue financing on an asset basis. So we've done with tower plants, other assets in the past.

Speaker 2

And so One of the significant aspects of the business and the reason why the CapEx goes down so precipitously is that now that you are going from the construction phase to the operating phase, The financeability at attractive levels of those assets increases markedly. And so in the total if you look at the total CapEx that we've invested Across the spectrum in the FLNG assets is the $1,300,000,000 FLNG 1, it's the additional $500,000,000 or so in FLNGs 23. Participants. That complex in its entirety has been very financeable in terms of the incremental capital we need to complete 2 and 3 and thus the CapEx that needs to go into it is so low. Participants.

Speaker 2

So it appears to be a precipitous drop in CapEx. It actually is a precipitous drop in CapEx. When I say it's the apex, it truly is the apex of all participants At the LNG liquefier complexes, generally speaking, they are financed at approximately 80% loan to value. So If you look at Venture Global or Cheniere or any of these other complexes that are out there, they're highly destininess on that side while they're in construction. Those are supported by long term contracts, which is that's the plus and minus for it.

Speaker 2

In our case, we have lots of downstream customers now that support these assets and the asset is essentially completed. So it makes the financeability of this extremely straightforward.

Speaker 7

Participants. Got it. I guess final follow-up with all the line of questioning is around, has there been any cost savings, I guess, as the projects have come onshore rather than participants The offshore original proposal?

Speaker 2

Yes. No massive cost savings, right? The first of anything you get the Pioneer premium of participants. So the first asset, as Chris said, is $1,300,000,000 for a 1,400,000 tonne liquefier for just under $1,000 a tonne For numbers 23 and onshore and utilizing existing infrastructure, those costs go down fairly significantly.

Speaker 4

Yes. So on modules alone, we think the cost participants is down about $125,000,000 to $150,000,000 each. So that's $250,000,000 across those 2. And then onshore work as you Can imagine is definitely cheaper to complete than the offshore stuff. We won't have any rig modifications or improvements to do here.

Speaker 4

And the site as we talked about on the last call is miraculous. Participants I mean, the site has already had its geotech. It's had full berthing tanks, everything you would need to really plug and play.

Operator

Participants. Next, we'll hear from Mike Patterson at Morgan Stanley. Participants.

Speaker 9

Thank you for taking the call. My question is regarding your preferred shares on Golar LNG, the 8.75s. Participants. Some time ago, these were delisted. They're currently not marginable.

Speaker 9

They can't be solicited. They traded on the pink sheets and I'll give you an example. They traded about a 16% yield. Yesterday, it was showing on the market about 14. Trade went through at 11.5%.

Speaker 9

And it just seems like quite a disservice to the shareholders of these preferreds to do that. Do you have

Speaker 4

Yes. Hey, Mike, this is Chris. Why don't you shoot me a note offline and we can talk through this. Participants We have put out this information publicly before and I'm happy to talk you through the financials are available and we can go through it offline.

Speaker 9

Participants Well, with all due respect, for about 3 months, I've tried to call in, e mail, and I never do get a return response on this. And so can you address How come that they're not listed and would you consider listing these shares?

Speaker 4

Yes, Mike. So The shares are not listed. They were delisted when we took private the GMLP Equity in 2021. We provide everything required for compliance participants will continue to do so.

Speaker 9

So you're just fine with them trading at $0.45 on the dollar and participants are doing this to the shareholder. And like I say, I take it offline, but I can't ever get a call answered, responded to at all. But it sounds like you're are not going to do anything regarding them, right?

Speaker 4

Mike, we're happy to look at what you're describing, but we have we stay in compliance with those shares and we provide all the information that's required On a quarterly basis.

Operator

Our next question will come today from Cameron Loughridge at Bank of America.

Speaker 10

Hey, guys. Good morning. Thanks for taking my question here. Congrats on getting everything in Puerto Rico set up and sounds like FLNG ones will be Moving well, so congrats on that. I really just wanted to ask, I wanted to circle back on the CapEx piece and unpack that a little bit.

Speaker 10

Participants I understand, there's some nuance with regards to maybe the financing of The CapEx to 23 and 24, but really I just want to unpack the difference participants are in the line of questioning the company's operating expenses. And we're seeing a lot of cash flow in the quarter. So, we're seeing a lot of cash flow in participants between what you were expecting last year or sorry, last quarter and what you're expecting now for 2023 and 2024. So just participants walk through that delta there, if you don't mind.

Speaker 4

Yes. I think fundamentally it's kind of what Wes was describing to the first question that Chris had. I mean, We believe that we're able to debt finance the balance of FLNG 2 and 3 Construction using the invested capital that we've already put in place from 1 and 2 and 3. So I think it's just fundamentally a difference in the presentation quarter over quarter that this is showing that we are able to use the debt Capacity that the units can pull.

Speaker 2

From a capital structure standpoint, you look at Page 4. So you've got A total of $7,000,000,000 in balance sheet and infrastructure in the company right now. Of that, about $6,000,000,000 has been funded over the last handful of years. So Massive amounts of infrastructure invested on balance sheet. As I said, the big difference really participants from a financing standpoint is that once assets go from construction projects to revenue producing, the financeability of them changes materially.

Speaker 2

Participants And so that's really why we now don't believe that we'll have material amounts of equity CapEx at all to invest going forward. Participants have already made the investment. They're now all turning into revenue producing assets. And with that, the financeability of them goes up substantially. And give a little bit of context to just the quality of the business, dollars 7,000,000,000 of infrastructure, which that's the core of the company and producing $1,600,000,000 in our forecast $2,400,000,000 in EBITDA next year.

Speaker 2

That's roughly a 30 plus percent infrastructure yield. To my knowledge, it's the best infrastructure yield on anything any company I'm aware of in the world. And so we've got when you and obviously, When you produce those kinds of revenues and long term revenues and customer facing revenues, the financeability of those projects goes up limit. And that's essentially What you're seeing play out in front of your eyes right now. That's why it's so transformational.

Speaker 10

Got it. Got it. So in other words, The $2,900,000,000 that was originally slated to be equity CapEx participants is now going to be $1,900,000,000 of equity CapEx and call it $1,000,000,000 of debt CapEx. Is that fair?

Speaker 5

That's exactly right.

Speaker 3

Participants.

Speaker 10

Okay. Got it. Got it. Okay. And then moving on to Puerto Rico or really this 2024 guidance generally, participants.

Speaker 10

Can you give us some context? Obviously, a lot coming online, especially in Puerto Rico, big back half ramp here. What should we be expecting as far as Puerto Rico's contribution to that $2,400,000,000 and also Paraquarana as participants Well, what are we expecting there?

Speaker 2

I mean, I'll let Brandon talk about Puerto Rico specifically. We don't provide participants on a terminal or country basis. We produce with Andrew walked through kind of what The volumetric capabilities are in each of these markets, but for a whole variety of reasons, we don't think it's appropriate to participants show margin for market by market. That's not really a great idea for our counterparties, constituents. There's lots of different factors that apply to that.

Speaker 2

So I understand that that would be simpler and easier to model and we appreciate that, but there's a host of other Competing factors that make it not really possible. So you can see the volumes go through. Puerto Rico in particular, Again, I'll let Brandon talk about this. But in the short term, the very short term, the short term power will actually be turned on. So The Palaseco plant is up and running.

Speaker 2

It's probably the most reliable power plant on the island right now, I think 99 plus percent. So it's actually performing like gangbusters. The San Juan project is in the last handful of weeks from being COD and up and running as well. And then there's a whole host of other projects to follow-up. Maybe Brandon, if you could talk about that later.

Speaker 6

Great. Thanks, Wes. Yes, really appreciate the question. And as Wes said, I think the way we think participants. We've got this amazing asset, which is the terminal in the north.

Speaker 6

We built it, anchored around the 300 Megawatt power plants is adjacent to it. But as Andrew referenced earlier, there's amazing embedded capacity in the terminal for expansion and to support other projects. I think the best example is the 3 50 megawatts that we're currently installing on a 2 year arrangement. And then as you could imagine as the Puerto Rico assets that are installed today on island that are using HFO and distillates as those Retire and are replaced, then the terminal is there to support incremental power that develops over time. So the way to think about The Puerto Rico strategy evolving is it has a short term, intermediate term and then long term aspect.

Speaker 6

And over time, what you should expect Hydrogen blend increases over time, so it hits your 3,700 Megawatt peak demand Even as the renewables and others come online. And again, 70% of the population lives in the San Juan Metro area, the NFE terminal is the participants are in the range of $1,000,000,000 of the same period in the quarter. So all of that transition will pass in some way, shape or form through that asset and so you should expect the contribution to grow over time.

Speaker 2

Yes. I mean, as Brandon said, it is without Dow, in our opinion, the largest energy transformation event in the world. And it happens to be a Commonwealth of the United States. And so they've got participants The capital available to do the right things. I mean, right now, the island has got tremendous resources.

Speaker 2

It's an amazing place, But for the electricity and energy systems. And so at 6:30 times more likely for the power to shut off than it would be if you lived in Miami or New York or Chicago, Obviously, that's not the right answer. And we are very, very happy to be in the thick of it. We think that there's Significant commercial opportunities as a result, but more importantly, there's just significant opportunities to do the right thing for Puerto Rico. I mean, I feel like participants It's got the potential to be Hawaii except people don't pay taxes, right?

Speaker 2

So it's got tremendous commercial opportunities as an island and As a Commonwealth, we feel very blessed to be there and we really are in the thick of what is without a doubt the biggest energy transformation Any market that we're aware of in the world. So there's a lot more to come in the next handful of months years.

Speaker 10

Got it. Thank you guys and I'll turn it back.

Operator

Sam Burwell at Jefferies, you have our next question.

Speaker 8

Hey, good morning guys.

Speaker 11

I mean the CapEx has been participants are fairly belabored at this point, but maybe ask from a balance sheet perspective, it seems like you're adding on a lot of debt and respect the fact that it's Like secured against these assets, but there's material amount of interest expense that's going to come with this. So like what are your what are you comfortable participants with adding to the balance sheet in terms of debt, how much interest expense are you comfortable layering on? I mean, the EBITDA guidance has been lowered, so there's

Speaker 10

Probably going

Speaker 11

to be free cash flow in the back half of the year if CapEx is pretty light, but when how soon can we expect participants are looking for genuine free cash flow generation so that you guys can start paying down the revolver?

Speaker 2

Immediately. I mean, if you look at the balance sheet, it's actually participants are in the range of $1,000,000 So all of the assets that we have basically invested in. So the Brazilian assets, The liquefier all the liquefier stuff that we're working on, that's all unleveraged. So you actually are talking about 1,000,000,000 and 1,000,000,000 of dollars of assets that are unleveraged in the balance sheet. And now You are now putting them into revenue producing generation.

Speaker 2

You'll now start to put leverage against them. And I think by I mean, You say that it's there's a lot of debt and interest expense. I'm not aware of an asset based infrastructure company as low leveraged participants is what we are on earth. So I actually think it's exactly the opposite of what you described. I think that the big use of capital during the building period has been The unleveraged use of equity capital of the fund construction, we've done that on balance sheet.

Speaker 2

Right now, as these turn on and literally the time frame for them turning on is the next participants. 2 weeks, 4 weeks, 6 weeks, 8 weeks, that's an incredibly short period of time. You then will start to produce material amounts of cash flow. And with such little amounts of capital needed to go into CapEx. You should expect immediately so that we could deleveraging the cash flow to go to it.

Speaker 2

Phone participants From a timing standpoint, we're halfway through roughly the Q3 right now. The Q4 and thereafter, we expect virtually all this stuff participants will be up and running. And so you'll see immediate impacts on cash flow and deleveraging to the bottom line. Participants.

Speaker 11

Okay. Fair enough. I mean the follow-up would be just on the CapEx that was deployed in 2Q. It looks like that was About $900,000,000 So what comprise that number?

Speaker 4

Yes, it's predominantly FLNG 1, 2 and 3. That's the bulk of it. Yes.

Speaker 2

Some capital in Puerto Rico. It's just these it's all these projects. We list all the projects we show you what the capital is and it's $3,200,000,000 in capital that's out the door. So it's actually I mean it is ironic. I think it's literally the opposite of your question.

Speaker 2

It is the most like unleveraged balance sheet that I'm aware of are in the process of revenue. And now they're actually revenue producing, we're going to go put debt against them. The debt actually we can do so at very, very competitive levels, right? We've financed Our Pacarena power plant, we financed our power plant that we installed in Puerto Rico. It's actually quite straightforward to produce revenue producing assets.

Speaker 2

It's hard to finance Construction projects. That's why we've done it on balance sheet. And I think when you think about it, we've actually from a standing start as a company, we've managed to build and invest $7,000,000,000 in the infrastructure assets, that's what our balance sheet is. That is a foundational fortress like balance sheet to actually start with. And now you're going to put modest amounts of debt against it and bring all the cash flow to the bottom line.

Speaker 2

It's going to be I've used the word many times. It is transformational in terms of participants will

Speaker 3

be available.

Operator

Our next question today comes from the line of Martin Malloy at Johnson Rice. Please go ahead.

Speaker 12

Good morning. I I was wondering if you could broadly talk about the Brazil terminals and commercial opportunities to put additional volumes through those terminals and participants may be the timing of potential announcements around that.

Speaker 5

Hey, thanks for the question. So we Barcarena is mechanically complete. We will COD in Q4 of this year and we'll immediately start up our contract with North Hydro. Participants. We see some material expansion opportunities right at the port, which will actually be very accretive to the kind of EBITDA and operating margin of the terminal.

Speaker 5

There's 4 other customers, a little bit smaller than Norsk Hydro, but still meaningful for us, that connect to our pipeline. We hope to find agreements with those guys over the next few months. Beyond that, we would obviously hope to expand our volumes in North Kydro over time. That's still the biggest alumina refinery in the world. Participants We're obviously providing volumes for their alumina refining process, so calcination and to fire their boilers, But there's a lot more growth we can do with them, both on the sort of process side as well as on the power side.

Speaker 5

So definitely more to do there. And then, we're 20% complete on our 600 Megawatt combined cycle power plant. We have another parcel of land there, which effectively could accommodate another over 600 megawatts. There's some exciting power auctions coming up in Brazil, participants are kind of various flavors, some that are more capacity based, some that are more energy based, but that are all kind of interesting for that site. Participants And so we see a ton of avenue for growth there.

Speaker 5

There's also sort of regional growth. There's a few power auctions coming up in Brazil For kind of regional capitals to bring gas in the form of gas to power projects. We think Barcarena is sort of So, import point in that northern region of Brazil is really the interesting place to import gas and then distribute it throughout the region. So, A lot happening in Barcarena and always that accelerates when we actually turn on. So the Celsius is in the yard being converted into an FSRU now.

Speaker 5

We expect that to arrive at Barcarena and commission the terminal in Q4, so very excited for that. With Santa Catarina, we've had great progress on the physical construction side. So we're mechanically complete today, which is very exciting. It's An amazing terminal that unlike Parque Arena connects into an existing pipeline system. And so we built the terminal as well as at a 33 kilometer pipeline participants connect into the TBG pipeline system in South Brazil.

Speaker 5

So it's very exciting. And then that gives us kind of a number of opportunities that we're actually pursuing Basically between now and the end of the year, to sell gas to customers on the pipeline, to sell services to some of the pipeline companies, so who are looking for Pipeline balancing and other sort of capacity services that we can provide. And then there's also a power story in the South as well. So power plants today that can access enough gas or can access gas at all. And then over time, the terminal to act as a main endpoint for gas into the So already gas using region of South Brazil.

Speaker 5

So a lot more to come there and that's really where we're accelerating our commercial activity around kind of mechanical completion, signing up contracts over the next few months and getting that asset online Q1 of 2024. So a lot more to come in Brazil, that's really just the start participants And we'll spend more time on that in future calls.

Speaker 2

Yes. I mean, the other thing which we don't probably do enough about is talk about the real impact that we have on the environment with the projects that we have. The Bacarena plant, which is again next to North Hydro, the biggest aluminum smelter in the world. North Hydro, I believe, is the largest buyer of Oil in South America. And essentially what you're going to do is turn off the oil and turn on the gas.

Speaker 2

And by doing so, they will save 1,000,000,000 of dollars in fuel costs and they will save participants. 1,000 and 1,000 of tons of CO2. We look across the portfolio, it's something we have talked about doing and I'll make an effort to get this out and on there. We have saved our customers 1,000,000,000 and 1,000,000,000 of dollars. I mean the impact of a country like Jamaica switching into natural gas versus Diesel these last number of years, the impact of the Commonwealth of Puerto Rico, the country of Mexico, I mean, delivered diesel into these countries It's roughly 2x what the price of delivered gases.

Speaker 2

So it's 1,000,000,000 and 1,000,000,000 of dollars to these countries. And in many cases, Their cost of fuel is their number one cost in the country. So, A, we've saved tremendous amounts of money by investing this critical infrastructure and getting into the countries. Participants. We have made them much, much more environmentally friendly.

Speaker 10

And of

Speaker 2

course, we all want 0 carbon. That's what everyone in the world wants. We want that as well and that's a big part of our Hydrogen Initiatives and others, but this is a major, major stepping stone to doing so. Last thing, and I just want to get back to the whole question on the finance, the infrastructure. The average infrastructure company, so a data center company, a company with toll roads, a company with ports is leveraged probably to tune 6 or 7 or 8 or even 9 times leverage.

Speaker 2

Our assets are turning on now. Our leverage by the end of next year is roughly 2 times. Participants It's a massively different complex and the notion that it's somehow like highly leveraged is just so far from the actual reality of what an infrastructure company looks like. And It's $7,000,000,000 in infrastructure, we're an infrastructure company. And our average term of our contracts is 10 years.

Speaker 2

And again, the way I think about the valuation and I'll just do it in simple terms. If I owned $7,000,000,000 in coffee shops, my forward sales in my coffee shops would be 0 because no one's bought any coffee tomorrow. I have $7,000,000,000 in infrastructure where the next like 10 years, I'm expected to collect $10,000,000,000 $12,000,000 $15,000,000,000 $20,000,000,000 and growing beyond that. So it It is essential infrastructure. It's very long term customer cash flows.

Speaker 2

The vast majority of it is to investment grade customers and our leverage is very low. That's the economic proposition of the company. I just want to reinforce that because I think we talked around it. I just want to make sure you hear from me kind of directly what I how I think of it. So anyhow, thanks.

Speaker 12

Participants. Thank you. Appreciate the answer. Just as a follow-up, I did want to ask about the hydrogen strategy and participants. Maybe if you could give us a flavor for the level of interest from industrial customers in terms

Speaker 3

of the

Speaker 12

offtake potential for these projects. I know your first project is surrounded by industrial customers. And also, I know Entergy has got a power plant they've talked about using hydrogen down there.

Speaker 8

Participants. Hey, Martin, it's Ken Nicholson here. Good morning. I'll take that question. We actually included a few slides in the appendix I think hydrogen broadly is something we're going to be talking more and more about as we make our way through the remainder of 2023 because there's a lot going on.

Speaker 8

Beaumont is doing great. You mentioned it. Yes, huge market, one of the biggest markets for hydrogen demand. So it's

Speaker 4

a great place for us

Speaker 8

to start our first facility. I would say the commercial conversations are going extremely well. Our deal Our technology provider is set for 100 megawatts of equivalent hydrogen production. Under that deal, we have an option to expand to 200 megawatts. I would say it is extremely likely that we will be exercising that option to expand.

Speaker 8

Participants. There's plenty of land available for the expansion and there's a heck of a lot of demand. The demand is coming from refineries and clean fuel producers, Petrochemical companies and other consumers of hydrogen, the site that we are building on in Beaumont is on a nexus of multiple participants including several hydrogen pipes and so we have low cost distribution to the entire Beaumont, participants are going very well. I mean that's the step 1 in Beaumont. At the same time, we're progressing a number of new participants focused on the Northeastern U.

Speaker 8

S, Pacific Northwest and an additional site on the Gulf Coast Not that far from Beaumont. Look, I think good progress being made. This really should be the largest pure play green hydrogen business And a first mover in what's an incredibly dynamic sector.

Speaker 12

Great. Thank you. I'll turn it back.

Operator

And we'll hear from Ryan Levine at Citi.

Speaker 13

Participants. Thanks for taking my question and squeezing me in. Just one clarifying question. What's driving your SG and A assumptions

Speaker 2

participants I mean, the SG and A assumptions are all being driven by kind of an organic grounds up look at the businesses. When you start a business running from scratch And you build up the capabilities we've got, you bring in a lot of people, you bring in a lot of systems, a lot of process. And then over time, you have a real chance to go back and reset it and kind of validate how you're organized, how you do things, what the costs are, etcetera. Participants. And we feel like there are significant potential for savings in our processes just as we mature as a company.

Speaker 2

I think actually the move into Puerto Rico for Genera and the associated people that are down there is also another A big factor for us, what we've got now a big operating company that's essentially a power company. So many of our activities in terms of back office and whatnot, we think we can participants rationalize and centralize there. We just feel like there's a tremendous amount of potential in terms of normalizing that. And as you move out of this participants. And again, dollars 6,000,000,000 or $7,000,000,000 in infrastructure spend in a handful of years.

Speaker 2

Obviously, there's a tremendous amount of building activity that goes on. That now goes down precipitously. And with that, come down a lot of costs and one off costs and everything else. And so You really can rationalize it. And I think that you'll see certainly next year for us a much more lean and refined SG and A process It actually generates the same kind of results at much, much lower cost.

Speaker 13

Is there a certain region within the company that has the biggest opportunity

Speaker 2

participants It's really on the operation side. When you think about it, you've got people who operate power plants and people who operate terminals and participants will operate logistics stuff. And as you get more scale in each of these sectors, There should be a lot of cost efficiencies that come into it and that's exactly what we think is going to happen. So just the probably the biggest single cost that I think is inefficient, but it's participants modified and improve our terminal in Puerto Rico, you take out massive like cost savings by just by simply being more efficient in how you use those ships. So participants I wish that it was easier to do from a standing start, but just the reality of it in my experience is that you need to build it up and be operationally efficient And then you need to really kind of optimize.

Speaker 2

And that's the phase that we're going through. And I think you're going to see over the next couple of quarters really, really significant changes in SG and A and participants are in the shipping side as we get more efficient of those two areas.

Speaker 13

Thanks for taking my question.

Speaker 6

You bet.

Operator

And that is our final question from our audience today. Mr. Pipitone, I will turn it back to you,

Speaker 1

participants will contact the Investor Relations team at irnewfortressenergy.com. Thank you and enjoy the rest of your day.

Speaker 2

Great. Thanks, everyone.

Operator

Ladies and gentlemen, this does conclude today's teleconference, and we do thank you all for joining. You may now disconnect your lines.

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Earnings Conference Call
New Fortress Energy Q2 2023
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