New Fortress Energy Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2024

There are 10 speakers on the call.

Operator

Good day, and welcome to the NFE Second Quarter 2024 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chance Pippitin. Please go ahead.

Speaker 1

Thank you, Samira, and good morning, everyone. Thank you for joining today's conference call, where we will discuss our Q2 2024 results. The call is being recorded and will be available by replay on the Investors section of our website under the subheading Events and Presentations. At the same location, you will find a presentation that we will walk through on today's call. Please review this as it includes important information, including disclosures and risk With that, I'll now hand over the call to our Chairman and CEO, Wes Edens.

Speaker 2

Great. Thanks, Chance, and welcome, everybody. Please refer to the slide deck that we posted on our website as well as on this call. We'll be referring to that, but we have a lot to run through here. I look forward to catching up.

Speaker 2

So let's start with numbers on Page 3. Our earnings for the quarter were $120,000,000 in EBITDA. That was well below our target of our quarterly goal of $275,000,000 with a miss of $155,000,000 The miss was entirely a result of the delay in the deployment of our first FLNG-one asset. Our goal is to bring this online in April of this year, and for a variety of reasons, we missed this by several months. That's the bad news.

Speaker 2

The good news is we did bring it online last month on July 19 and has been performing very well since then. It's an incredibly valuable project and bringing it online and the timeline we achieved is a major accomplishment. It's a $2,000,000,000 plus investment and in today's market generates $500,000,000 a year free cash flow. So it's highly profitable and has a big impact on the business. But as a result of the impact of the delay of even a few months is material and had a big impact on the quarter that recently concluded.

Speaker 2

As I said, the good news is the project is up and running and has been performing well. We performed our first transfer of a partial cargo early this morning. We'll now shut down the unit for approximately a week for planned maintenance and then fire back up and expect to achieve full production levels shortly thereafter. This then becomes a cornerstone asset for our company. Flip to Page 4, please.

Speaker 2

Page 4, this is a bit of a recap of our past, present and future financial results are shown here. In 2023, we made $1,300,000,000 In the Q1 of 2024, we made $340,000,000 That was the last quarter that we had any of the residual impacts of the FEMA contracts. It was a good quarter for us. The one that recently concluded $120,000,000 our goal and forecast is for $275,000,000 a quarter for the remainder of the year. Q3 will also be impacted by the delay as we cut this online in July.

Speaker 2

We don't expect to get full production of this until the 1st September and thus it will be somewhat reduced from the 2.75 goal. And then Q4 is a full quarter's production of $275,000,000 The FEMA claim that we talk about in just a few minutes with Brannen, we'll bring this up to total EBITDA expectations for the year with a range of $1,400,000,000 to $1,500,000,000 Guidance for next year is $1,300,000,000 Basically, that is just the existing volumes and customers plus the addition of our Nicaragua and Brazilian assets. At this point, over 90% of our expected revenues are contracted, so we feel very confident about achieving these results and feel that there is room for significant upside given that we're only about halfway through 2024. In addition, with the remainder of our Brazil contracts coming online in mid-twenty 26, we expect this $1,350,000,000 to grow materially, which Andrew Deedy will go through in just a moment. Turning to Page 5.

Speaker 2

Our broadly diversified business is now very easy to model and understand. And here's the math for next year. Our total supply at this is approximately 170 TBtu. 50 TBtu equals 1 ton of LNG. So we have a current supply in our portfolio of approximately 3.5 1,000,000 tons for next year.

Speaker 2

The 5 countries shown in the net margins are weighted average over the various customer contracts. They range between the countries from $4.5 to $8 in margin. In general, this is a function of the proportion of the capital we invested in order to achieve these results. In simple terms, in those markets with the largest investment, in particular Brazil and Puerto Rico, our margins are the highest. The weighted net average is approximately $7 multiply 7 times 170 gives you approximately $1,200,000,000 at $100,000,000 per ship operating margin, you get to our forecasted profit of $1,300,000,000 Obviously, to the extent we sell more gas or more power, these numbers go up.

Speaker 2

We've invested approximately $8,000,000,000 to create this portfolio of gas and ships and power plants and terminals, and that investment is now behind us. And thus our goal is to grow organically from here with little or no additional CapEx. The deployment of the FLNG asset represents a watershed event for us with respect to our investment activities now we are singularly focused on organic earnings and free cash flow. Page 6 is a simple page, which shows you with the take behind the FLNG-one project at current market levels. You can just follow along the top.

Speaker 2

Total capacity of the unit is 1,400,000 tons, which is 70 GBtu. Cost of LNG produced today is Henry Hub plus $2.50 or about $4.50 in total. The average margin of our business, as I said, is $7 7 times 70 equals 4.90. Using our own facility and ships greatly reduces our logistics costs by $100,000,000 which then adds up to $590,000,000 or roughly $150,000,000 a quarter. It's pretty simple math.

Speaker 2

Flip to Page 7. Operationally, we had a terrific quarter, highlighted by the FLNG-1 put into service. First cargo was actually transferred early this morning. Planned maintenance starts tonight for 7 days and we expect full production shortly thereafter. Completion of FLNG 1 triggered the FLNG 2 financing, which is entirely equity financed and requires no additional equity capital from us.

Speaker 2

The Brazilian terminals are complete. There's a beehive of great activity that I'll leave to Andrew to go through. Nicaragua is also nearly complete, and I'll run through that in just a second. So if you flip over to Page number 8, we'll talk about Nicaragua. This is on the left hand side is a picture of the power plant that we have built that is 100% completed.

Speaker 2

It's a 300 megawatt power plant. I think it's the first new modern power plant built in the country in the last 30 years. It is ready for operations. 5 miles away, there's a jetty, the FSU will be moored at. That jetty is 95% complete as you can see from the picture here, waiting for the ship to show up.

Speaker 2

The last bit of kit to be installed is the 5 Mile pipeline. All those construction materials were delivered in the last couple of weeks and they're ready to be installed. We expect that to be completed in September and begin operations thereafter. Our power plant is also located next to the IDB line, which allows us then export power from Nicaragua to neighboring countries. So we feel like this is not just a Nicaragua terminal, but actually a Central American terminal.

Speaker 2

We think that there's a significant amount of activity that comes as a result of that. With that, let me turn it over to Andrew. Andrew?

Speaker 3

Good morning, everybody. Thanks, Wes. I'm on Page 9 for a similar update on Brazil. So, 2 big assets that we want to check-in on that are a big part of our kind of future growth and future projections here. The first is the Selva II power plant.

Speaker 3

So that's our 630 Megawatt power plant with the COD of July 2025. You can see a picture of that on the left. It's a small picture, but there is a big site and a ton of activity going on there. It's a 6 30 megawatt 1 on 1 combined cycle power plant, 25 year PPA fully financed with BNDES debt from Brazil and we're 70% complete today and well on track to commence cash flows in the second half of next year. So everything is going great there.

Speaker 3

As you know, this power plant is adjacent to our Buckarena terminal, which has been operational now for a few months. We've had 2 different cargoes loaded into Barcarena already. So we're operating very well and everything is going great in Barcarena and Selba. To the right is our Porto Sen project. So this is the project that we acquired in December and we've made great progress since then.

Speaker 3

So 1600 Megawatt power plant, 15 year PPA. We are now fully permitted. We've given full notice to proceed on our construction consortium, which is made up of Mitsubishi and Andrade Gutierrez. We've made great progress on the site fully cleared. And as you can see from the picture on the right, we're actually starting to pour the foundation, which is a big step for us.

Speaker 3

And then Mitsubishi has made great progress on the turbines. You can see the picture of one of them, and we are well on track, actually well ahead of schedule for our COD, which is second half of twenty twenty six. North Hydro is moving through commissioning really well to Buckrana terminal. Gas volumes are up to about 60% of the contract demand as we commission the boilers and the calciners of their Alunorte alumina refinery 1 by 1. We expect to be at full ramp up on that contract by October of this year and Buckorin is really coming together very well.

Speaker 3

I'm flipping to Page 10 for a bit of a further update on Brazil. There's 2 other things we just want to check-in on. One is our contracted EBITDA from Brazil is planned to be about $470,000,000 by 2026 when we turn on the Barcarena terminal, the 2 power plants I went through and then also our TGS terminal which is operational. So our current contracted book $470,000,000 of EBITDA by 2026. And then the second thing is the growth that we expect out of Brazil, which is really from our TGS terminal in Santa Catarina.

Speaker 3

We are expecting the power auction to happen this year. We expect to win 2.5 gigawatts of power. That will be a mix between power that NFE builds and owns and other power plants that we supply on a contract which will pay us a fixed margin plus compensate us for the gas supply. So we have $470,000,000 of contracted margin. We believe that this power auction in Santa Catarina can increase our EBITDA by another $400,000,000 and so we have great growth in Brazil over the next 3 to 5 years.

Speaker 3

I'm going to move next to the structure and capital structure and CapEx update on Page 12. So we have a few pages here to really walk through our next steps for the capital structure of NFV. And on Page 12, we have 2 main initiatives. First is to refinance our existing 2025 notes, those are due in September of next year. We'll look to extend the maturity of those notes as soon as possible.

Speaker 3

We have an existing commitment to backstop this refinancing. And so we feel like getting those notes refinanced is secure and we'll be in the market here soon to kind of get the best execution on that refinancing that we can. 2nd is we're going to target less than 4 times debt to EBITDA and that's senior secured corporate leverage to EBITDA by 2026. You can see on the right side where we have effectively kind of shown what our guidance is for 2024 and 2025 as well as our LTM in 2023 debt to EBITDA metrics. And then you can see kind of how we're doing that math with all the debt laid out below that here.

Speaker 3

As Wes went through, we forecast $1,300,000,000 of EBITDA in 2025, which would almost be exactly 4 times debt to EBITDA. And then in 2026, when Porto San, Brazil and other assets turn online, we'll continue to grow that EBITDA and be below 4x debt to EBITDA. So based on our projections here, we end up at a very comfortable amount of overall kind of long term leverage at the corporate level. The next thing I want to walk through is basically how we're going to kind of continue to create more overall cash for debt service to deleverage and then more of course free cash flow available for equity holders. And the first thing to kind of make that point is to show our CapEx.

Speaker 3

So Page 13 is a CapEx overview for the remaining part of 2024 and then into 2025. The key point here is that obviously we're done with FLNG 1. CapEx is going down precipitously. We've got kind of small bite sized CapEx on our downstream projects to finish those out and start generating revenues in 2025. You can see Brazil, Mexico, Nicaragua, Puerto Rico here on the page.

Speaker 3

That leads to about $128,000,000 of net CapEx at the end of the year. And then we have CapEx on FLNG2, which is also here as well, netted against the term loan that we have for FLNG2. So really from a net CapEx perspective, we've got about $177,000,000 for the remaining part of 2024 and then in 2025 that drops way off at $67,000,000 of CapEx. So we'll see flipping to Page 14 is how that materially impacts the cash generation. So what we wanted to do here is provide a very simple walk from our adjusted EBITDA reported numbers to what really is kind of our cash flow available for debt service.

Speaker 3

So the cash we have to pay debt, eventually deleverage and then of course also generate free cash flow. So in the remaining part of 2024, we start with $1,000,000,000 of adjusted EBITDA and we end up with $683,000,000 of cash available for debt service. In 2025, we're going to decrease SG and A, we're going to decrease CapEx and we're going to end up $1,300,000,000 of adjusted EBITDA, but $933,000,000 of cash flow available for debt service. So just wanted to provide a few numbers here and how lowering that overall CapEx spend actually leads to higher free cash flow for the business. And then looking to Page 15 is the real long term initiatives on our capital structure, which is effectively to migrate what we showed on the first page of this section, which is the sort of corporate loan leverage to asset level leverage.

Speaker 3

And this does 2 really important things for us. The first is it really harmonizes our long term assets and contracts with longer term debt. And by having longer term debt, we bring down cost and we're able to lower corporate leverage to the benefit of equity holders. So our FLNG 1 asset, 30 year useful life, dollars 2,000,000,000 replacement cost and we expect to have $250,000,000 of kind of annual cash flow at the asset. So we're showing illustrative asset debt of about $1,500,000,000 which we think is very achievable.

Speaker 3

On the right side, NFE Brazil, 18 year average contract duration, dollars 500,000,000 of run rate EBITDA in 2026, dollars 2.2 gigawatts of power plants, dollars 46 TBtu of firm gas sales and we expect almost $4,000,000,000 of enterprise value in 2026, which is a simple 8 times the $500,000,000 of contracted EBITDA. On that $4,000,000,000 of enterprise value, we'll have about $1,000,000,000 of long term asset level leverage, which we're using for construction. And then we assume we can get to basically 50% LTV on that, so another $1,000,000,000 of leverage. That together with the FLNG one debt would mean $2,500,000,000 of leverage would migrate from the corporate level over time to the asset level and we'd end up with a long term sustainable capital structure at the NFE corporate level and then with assets where we've aligned our long term duration cash flows and assets with long term duration lower cost debt. Wes, back to you.

Speaker 2

Great. Thanks, Andrew. So let's talk about our new initiative, which is really just a continuation of an existing business that we've had around here for many, many years. So look to Page 17. A big, big part of our business here at NFE is the development of power systems and management of those systems.

Speaker 2

We own or manage 9 gigawatts of power between La Paz, Mexico, Porto San Dino, our new project, Jamalco in Jamaica, Puerto Rico, of course, and then in Bahrain in Brazil. We are a global leader in power systems development overall. We own or have visibility of 2 gigawatts of turbines that are available for development in this modular form that we'll talk about in just a second. So our experience here is very, very significant. And in particular, with respect to the deployment of modular, highly reliable power systems.

Speaker 2

You flip to Page number 18 of the two pictures that are shown the power plants we built for the federal government last year. 4 25 megawatts of power was built in just 120 days. It provides 15% of the baseload power to the grid to Puerto Rico and is by far the most stable and reliable portion of the grid with total availability of 99%. We're going to talk about this modular design with what we believe is the impact that we can achieve here in the United States on assisting data center tenants. But before I do that, let me turn it over to Brandon just to pause right now and talk about this project and the FEMA contract and the claim and then where we are right now.

Speaker 2

Brandon?

Speaker 4

You bet. Thank you, Wes. Really appreciate that. And just as a reminder for folks on the phone, as Wes stated, this project originated with FEMA initiating a grid stabilization mission for Puerto Rico. NFE responded by entering into 2 contracts, each of which were for a 2 year duration to build about 4 25 megawatts of power.

Speaker 4

Just to put it in perspective, NFE built this power, put it online on the grid in 120 days, it's the fastest deployment of large scale power in the history of the U. S. Army Corps, which is actually saying something. In addition, it's an essential piece of infrastructure for the PR grid, about 15% of the grid currently is supplied by this power and to put that in context without it, hundreds of thousands of customers in Puerto Rico would not be receiving power every day. Most importantly though, this particular power these 2 particular power plants are 99% available and 99% reliable, which I think is very key part of this particular solution, in particular how it will apply to other applications, which we'll talk to in further slides.

Speaker 4

To put a couple of dates out there, on March 15, NFE sold these 2 power plants to Puerto Rico at the end of the contracts that FEMA had decided to conclude. In addition, we entered into an 80 TBTU island wide contract with no disruption of service. So from the point of view of the Puerto Rican people, these power plants continue to operate without interruption. Importantly, because our contracts were 2 years, the government does have a right to end contracts early if they have a change in need, a change in policy or a change in strategy. However, if that happens, the government has an obligation to make certain payments to the contractors who are performing under those contracts.

Speaker 4

We have been going through a process, which is considered a claim settlement process over the last several months to put together an extensive package with outside professionals who specialize in this, including our own team. We have submitted that package as a formal claim to Weston, who is our prime contractor and they in turn have submitted it to the Army Corps. The claim is in an amount of $659,000,000 which approximates essentially what we are entitled to under the rules, under this type of circumstance. To put it in perspective, there are 1,000,000,000 of dollars that were remaining to be owed on the contracts of 659,000,000 dollars fits well within the four corners of what we would be entitled to under this process. In terms of next steps, we will go through a claim settlement process, which is a well worn path and we will update people as to the results once they are known.

Speaker 4

I think the important part of this project though is that it created extensive IP inside of NFE that showed us how, what technology to use and the utilization of providing fast power for certain applications, including its reliability and availability. The speed at which we deploy this power, the team that we use, the IP that we created can be applied to other concepts, including perhaps the fastest growing area of infrastructure in the U. S. And for that, I'll turn it over to Wes to talk more about on Page 19.

Speaker 2

Great. Thanks, Brandon. So these are the type of power systems that are most typically found in emerging markets that have significant power needs. And most importantly, they need power now. So some of the needs power now, giving them a power solution that turns on in 3 or 4 or 5 years is simply not reflective of what their needs actually are.

Speaker 2

As it turns out, there's another market much closer to home that has a very similar need, hyperscaler data center users. You wouldn't think that emerging markets for power and hyper scale data center users would be similar, but actually they are quite similar. If you look to Page number 19, we formed a new company, we call it Klondike, that is focused on providing these kind of power solutions to data centers. Page 19 shows the incredible growth of cloud computing that has occurred as companies have moved their computing needs out of their own servers into the hands of Amazon, Microsoft and others. To meet these needs, there have been literally thousands of data centers built in this country and they've traditionally been built along the lines of the steps outlined on Page number 20.

Speaker 2

Step 1, identify a site, locate that site close to end userscity centers to mitigate latency issues. Step 2, apply to the local utility for power. Power supply is subject to grid availability, but these were modest amounts of power initially, and so that was the process that was followed. And number 3 is the data center then to increase the reliability actually constructs their own backup power, which is necessary to provide the power redundancy that they need for their customers. These steps require connection to local grids, creating power struggle with local consumers.

Speaker 2

New grid connections can take 3 to 5 years and data center tenants need power now. Look at Page 21. This is a schematic that shows the island power that we are designing. In simple terms, it's the same basic formula, which Brandon just described in Puerto Rico and Mexico and elsewhere. What we've done in addition to what we installed in those markets is we install backup generation to provide additional redundancy.

Speaker 2

So you look at the schematic, you can see an array of turbines that are shown on the upper middle and upper right hand side and then 4 additional turbines that are shown on the left hand side. Basically by increasing the number of backup units, you take system reliability, which is already extremely high, 99 plus percent in our experience in Puerto Rico, and you make it well over 100%. And you achieve then the 5 nines reliability that are necessary for the data center users and do so in both a very efficient way, a very, very quick path that's 120 days to deploy and one that has ultimate system reliability. So Page number 22, we're addressing all the major constraints of digital infrastructure development by utilizing this behind the meter on-site power and the business is up and running. So step 1 is to identify a site with either a data center partner or our own site and we're working on both as we speak.

Speaker 2

We are preparing to file permits on the site that we own in Pennsylvania. Pennsylvania and Ohio in particular, we believe are very attractive because of their physical proximity to large population centers as well as very abundant and inexpensive natural gas, which is a terrific combination. So step 1 is identify a site that works. Step 2 is to develop a state of the art Smart Island grid, which in the process of doing right now, which utilizes the same factors, which I outlined in the previous page to achieve redundancy. And number 3 is get power permits in hand and install this and turn on power next year.

Speaker 2

Page 23, we outlined we have a number of our sites in our portfolio that we think are very suitable for fast power situations. We have the large site in Wyalusing, Pennsylvania, which we acquired years ago. We have a site in Shannon, Ireland, which is the site where we're intending to build a power plant that we have provide power in part to the grid in Ireland and have the capacity to provide behind the meter power to data center tenants there as well. And then a large site in Brazil, which is permitted for 1,000 megawatts of power on a 100 acre site located off the TBG pipeline, so we can provide the gas to provide the redundancy there. The economics of this business are potentially very compelling.

Speaker 2

Our expectation is we'll enter into a long term commitment with data center tenants that are creditworthy. This can provide certainty of cash flow, allow us to finance this at a very low cost for an extended period. It's very exciting days for this business and one which if it's successful we would likely spend to shareholders as the valuation metrics for this industry given the growth attributes of it are very, very appealing. So a lot more to come on that. Chris?

Speaker 5

Yes. Thanks, Wes. Good morning, everybody. Let's turn to Slide number 25 and talk through earnings for a moment. As you've heard from Wes and Andrew, which have covered the bulk of the financing initiatives of the company, I'll quickly walk through the financial results for the Q2.

Speaker 5

Total operating margin was $202,000,000 from sales to customers through our downstream terminals in addition to $12,000,000 associated with LNG sales. And on this quarter, as we did in Q1, we had another $34,000,000 of operating margin from the Ship segment. So it's a total segment operating margin of $248,000,000 which compares to $384,000,000 in Q1. When you back out SG and A and deferred earnings, our adjusted EBITDA for the Q1 was $120,000,000 The deferred earnings line will be further explained in the 10 Q, but this is a result of a $90,000,000 payment received for gas deliveries that will occur during Q3 and Q4. On these sales, we locked in commodity pricing and will record $107,000,000 of EBITDA and earnings associated with these volumes throughout the balance of 2024.

Speaker 5

As previously mentioned, the decrease in adjusted EBITDA quarter over quarter is predominantly driven by the termination of the FEMA Power contract. This decrease was expected to be made up in large part with volumes from FLNG 1 available to sell. However, those did not occur in Q2 and the $120,000,000 of EBITDA was the result. As Wes mentioned, once you have a full quarter of volumes from FLNG 1, we would expect the quarterly adjusted EBITDA to be around $275,000,000 Moving on to Slide number 26, we show the GAAP net income for the quarter, which was an $89,000,000 loss or $0.44 per share on a diluted basis. There's only a modest change to adjusted net income which adds back a non cash impairment charge of $4,000,000 or $0.03 a share.

Speaker 5

So if you add up Q1 and Q2 for the first half of twenty twenty four, we had $53,000,000 of adjusted net income or $0.26 a share and $142,000,000 of funds from operations or $0.69 per share. Also just to repeat something we've mentioned in the past, when we collect on the claim from FEMA that will be recognized as EBITDA and income during the period in which it is received. Finally, I wanted to mention that NFP's operating assets in Jamaica, Puerto Rico, Mexico had 99% uptime and reliability for the quarter, which is a testament to the tenacity of our team. With that, I'll turn the call back over to Chance for Q and A.

Speaker 1

Thanks, Chris. Operator, if you would, let's open up the lines for some Q and A. Thank you.

Operator

Thank you. And we'll take our first question from Ben Nolan with Stifel. Please go ahead.

Speaker 6

Yes. Thank you. So my first question

Speaker 3

is related

Speaker 6

to the seismic contract. It looks like you've maybe got $500,000,000 of that in the EBITDA for the back half of the year. Can you maybe talk through how you feel about how you come to that number and any flexibility on timing? Is this a 4Q event or might it slip into next year? Any thoughts around that?

Speaker 4

Yes, Ben, this is Brandon. Thank you for the question. And probably what I'll use it is just an opportunity to kind lay this out and sort of demystify it. As I kind of said on the call, the original contract was for 2 years. Government has the right to terminate early under various circumstances.

Speaker 4

When that happens, there is a very tried and true kind of playbook and set of rules that you go through as the counterparty to the government to basically settle up. And the idea from the government perspective is they're trying to put you in a place that you would have been, had they fully performed, particularly with respect to investments and commitments, etcetera, that you've made. I think the key concept to kind of realize here is, keep in mind what we actually did for them is build 2 power plants, 4 25 Megawatts and that work was complete at the time of COD. So functionally, the investments, commitments, all the other things that we position the business to do were in effect done at the time we turned on the power plant, which is I think a key concept. So when you go through this process with them, if you kind of aggregate gross sort of amounts owing under those two contracts kind of from the time that they stopped to the time it would have finished.

Speaker 4

Obviously, you know the math, it's measured in the 1,000,000,000 of dollars. So we've gone through an extensive dialogue with Weston, who is our counterparty. We have lots of folks who do this professionally all the time for the government and through that process we have kind of zeroed in on really 2 concepts. 1 is the fact that we did a ton of work around infrastructure logistics chains kind of positioning our business to make it work, particularly with respect to like ships and terminals and gear, etcetera. And then also with respect to the fuel that was being provided.

Speaker 4

So when you add all those line items up and you kind of go through the entitlement rules, it actually adds up to to right around $659,000,000 So that was put on a piece of paper with thousands of pages of backup submitted to Weston. They in turn did their initial take on it. We had a little bit of puts and takes on that, but essentially the number stayed the same. And then they turn around, put their name on it and then send it in to the Army Corps for processing. And then effectively you will enter into what is best thought of as a contract settlement process with them at some point.

Speaker 4

Now, Weston is our counterparty. So that's actually the person that we'll be dealing with and then presumably we will make ourselves available for the Army Corps. As to timing, I think there is no certainty on that because you're talking about a government process that there would be a dialogue around. But just keep in mind the following, we have been in dialogue for the last 4 or 5 months going back and forth over the details, providing information functionally what you're doing is checking off on somebody's due diligence checklist. And so we'll continue that process, make ourselves available as soon as anybody wants to talk about it.

Speaker 4

I think our belief is that we will get engagement here pretty soon and our goal is to try to settle this in the Q3.

Speaker 6

Okay. I appreciate it. And then sticking with Puerto Rico for a second, and thinking about the incremental ADTBTU ILUM wide side of it, that should be online in the Q4. Is there anything that would stand in the way of reaching that threshold? And is the power generation, gas power generation sufficient to absorb all of that?

Speaker 6

I mean is there anything that could get in the way of that AGBT?

Speaker 4

Yes. So let me I'm going to start by answering it in this way just because of the way you ended it. I think the way to think about the Puerto Rican system, because this is our strategy, is it actually needs 5,500 megawatts of power, right? That's the way to think about it. It peaks at 3.3 gigawatts.

Speaker 4

You need about 700 megawatts of operational reserve, 900 megawatts of maintenance reserve and 600 megawatts of generation reserve, that's what they need. Today, you don't have that. And so functionally, what's getting ready to happen is with our 2 power plants that we made available, plus the mega gens that will be converted plus Mayaguez will be converted plus the other projects we're doing including adding additional power either through our own process or through the P3 process, our expectation is we'll hit those metrics certainly over time. As it relates to today, what we are hyper focused on are things that we can convert in the short term. The mega gens as we talk about often are gas ready today.

Speaker 4

There's a regulatory process that we have to go through that we're almost complete. But as soon as that paperwork comes in and is done, then that 86, 90 megawatts will be turned on to gas. It's turned on to gas, it will go down in the merit order, up in the merit order, however you want to think about it. In other words, it becomes cheaper and more likely to dispatch and then more likely to displace diesel and other generation, both because of inefficiency and fuel cost that are currently running.

Speaker 2

Yes. And one other thing to amplify on that Ben is that when our business now is so easy to model and I went through the numbers on the page. So 170 TBtu's of that about 150 of it is already contracted, right, not including the upsize in the Puerto Rico contract. So your 88% of the 2025 results are essentially 100% contracted or 88% contracted right now. The incremental volumes that Brandon is talking about are the other 40 or so TBtu.

Speaker 2

So you actually have to go out and buy incremental fuel in order to supply those contracts. Also a happy coincidence is that the margin on the Puerto Rican contracts as we go through the illustrative margin there is about the same margin if you just sold those volumes into the marketplace. So the market for LNG today is about $13 The margin on those contracts would be about $13 as a sale price. So it doesn't really matter. There's really literally no incremental risk one way or the other.

Speaker 2

Obviously, our goal long term is to serve customers. We want to serve our customers there. As Brandon said, when you look at the island wide needs that they have for power and cheaper power and cleaner power, they're significant. They're far beyond the size of the scale of what the contract is in place. So we feel like the organic ability to grow that contract is material.

Speaker 2

Simply fulfilling it will actually utilize all the existing portfolio of gas that we have right now. And we think there's a significant amount of upside beyond that. And then last and again, the same point is that the price in the market, the price in the markets for our products is basically the same. So in that happy coincidence, there's actually no real financial exposure whatsoever. So it's an incredibly secure place today, if that makes sense.

Operator

Thank you. And we'll take our next question from Greg Lewis with CCIC. Please go ahead.

Speaker 7

Yes. Hi. Thank you and good morning and thanks for taking my questions. I guess I want to follow-up with Ben just in some of the comments. So as we think about where the market is today around pricing and realizing those spreads, How are we thinking about and with the financing coming off, how are we thinking about hedging our natural gas our power exposure?

Speaker 7

How are we thinking about that on the commodity side? Is that something we're actively looking to do and just kind of an update there?

Speaker 2

We essentially have no exposure. As I said, we have a portfolio of 170 TBtu's. You have current demand, current demand in hand for 150 TBtu's with a large pipeline behind that. And the market is basically right on top of what our net spreads are to deliver to customers. So in terms of our business, it is really purely a spread business right now.

Speaker 2

We basically buy gas or manufacturing LNG, right. And we list there's a couple of portfolio purchases that we make on a long term basis than we have our own. We have long term offtake contracts. The average term of our contract is well in excess of 10 years. We then simply provide logistics in the middle and deliver to it.

Speaker 2

So it really is a spread business. It's one we have spent $8,000,000,000 roughly building to get to this point. So we invested a tremendous amount of capital to get there. We made $1,300,000,000 last year. We think we're going to make between $1,400,000,000 $1,500,000,000 this year.

Speaker 2

Notably, with no additional FEMA dollars coming whatsoever, we think the number is $1,300,000,000 is the guidance for next year. And I showed that as simple as you possibly can, which is 170 TBtu's times the $7 margin that is across our business, plus the $100,000,000 roughly of ship operating results that gets you to 1,300,000,000 dollars As Andrew said, incrementally, what is in hand long term contracts capacity payments additionally in Brazil add 100 of 1,000,000 of dollars to that. So you really have a business which now is rock solid, is highly diversified, has a $1,500,000,000 and growing EBITDA in the gun size for it with essentially no more CapEx spend to do it. So that's the profile of the business right now. Obviously, the results of a quarter like this are disappointing, but you're measuring a 30 year business across the 3 month timeframe.

Speaker 2

We had a delay of a couple of months. Unfortunately, that happens. That's behind us. It now operates and it works well. And so we feel like the financial footing of the company is incredibly secure.

Speaker 2

We've got, as Andrew went through in great detail, we have a real goal to have less debt and longer term and lower cost debt over time and the path to get there is incrementally just to perform as we have and we'll go through it. I think we feel really, really good about the prospects for doing that productively here in the very short term.

Speaker 7

Okay. And then just on the opportunity in Pennsylvania and Ohio, I mean, obviously, everyone saw the PGM news around the auction pricing. Could you talk a little bit about is that an opportunity or just where we look today as we bring your fast power solution to that area of the country? I guess, how should we be thinking about that over the next couple of years and that opportunity?

Speaker 2

Yes. I think that it is perhaps the best market for data center development, not just in the United States, but perhaps around the world. It's got a combination of plentiful land. It's got actually large population centers, which are nearby, and it has very inexpensive and very long term gas. So gas today, the lighting index today is around $1.50 So the actual energy payment component of that is actually really, really attractive.

Speaker 2

The challenge for the data center providers is exactly what I outlined. If they are going typically to a utility and saying I need 5 or 10 or 20 megawatts worth of power, that apply for a grid connection, that get it in relatively short order, they develop it and move on. They now go in for 100, if not 1,000 of megawatts and that's a real problem. So what you've seen is at PJM and then at the utilities, AEP and others are real backup. So what was previously maybe a 6 month or 9 month process now can be a 3 year or a 5 year or 7 year process and that simply is not responsive to the business needs that they have.

Speaker 2

That's where we come in. The fast power solutions that we have, the IP, as Brandon described, is incredibly valuable. And what's also incredibly valuable is that we have a portfolio of turbines in a warehouse, plus we have access to other turbines. And so we have the feedstock that you need to actually then provide this and the knowledge and the ability to install this quickly. So the basic process is take a site.

Speaker 2

We have a phenomenal site in Wyaluxim that we developed over the last several years. It's on a large natural gas pipeline. It's got adjacency to fiber. It's actually close just down the road actually from the Talon power plant. So it gives you some sense of like the attractiveness of that to a prospective data center user.

Speaker 2

We then simply build, apply for permits, build our power, provide redundancy to it, that then allows it to mimic the redundancy they would get with a grid, except it's an island power and we can do so and turn on power, we think in 2025. There is no way they can get power to the grid in 2025. In fact, for most of the utilities around the country, we think that the timeline to get power could be 3 years or 4 years or 5 years. So go call your favorite hyperscaler tenant, there's many of them, ask them what their prospects are for their business. The answer is great.

Speaker 2

Ask them what their prospects are for getting power now and their answers are decidedly less great. That's basically the business. What we want to be is the power provider to these data centers. This is not a me too, let's go build a bunch of data centers. There's a lot of people that can do that and do a terrific job of that.

Speaker 2

What we are very expert at is providing fast and low cost and reliable power systems. That's what they need. That's what we have. That's what we think the opportunity is. I think the best place to prosecute that in my opinion at this point is Pennsylvania and Ohio because they both are places that have lots of demand from the hyperscalers for data centers and you have abundant supply of gas.

Speaker 2

And those two things together are a very, very powerful combination.

Operator

Thank you. And we'll take our next question from Craig Shere with Tuohy Brothers. Please go ahead.

Speaker 8

Good morning. Thanks for taking the questions. So after Nicaragua, do you see further downstream growth in 2025 restricted by a dearth of economically contracted or internally produced LNG supply? And how do you see that changing for the better or worse in the 2026, 2027?

Speaker 2

It's a really good question, Craig. As you know, there's still a shortage of LNG. That's why prices are still relatively elevated, so modest compared to

Speaker 3

where they were at the

Speaker 2

height of the Ukrainian Russian conflict, but still reasonably high. So if you think that Henry Hub, next year is forecasted to be around $3.50 Add $2.50 is a good proxy for what would be the cost of it plus an add or something that's a $6 cost to buy LNG in the marketplace long term. And the market is roughly $6 or $7 higher than that. It's $13 $13.5 kind of etcetera. Those numbers come down dramatically as you move to 2027 beyond.

Speaker 2

In 2027, 2028, there is a significant amount of LNG supply that's coming online in Qatar and other places in the world. Venture Global has a significant amount of supply at that point in time. So we think that there is a bit of a window. That's why we're so focused on getting this first asset up and running. So today, 2024, 2025, 2026, very valuable.

Speaker 2

After that, we think it's a much more normalized market. In a more normalized market, the power is the downstream.

Speaker 9

And so

Speaker 2

the $8,000,000,000 we spent in developing largely our downstream portfolio allows us to access markets that are large and growing Mexico, Brazil in the top of that list, but also Puerto Rico, Central America, Jamaica, those are countries that also have incremental demand. So we did feel like there's a lot of organic growth to come from our portfolio. We think there's a lot of availability of gas out a couple of years and we've got our own supply to take care of our customers over the next couple of years. So with the numbers that are in hand right now, the $1,300,000,000 we feel is rock solid and we feel like the increments in Brazil are another several $100,000,000 are actually contracted and are being built, as Andrew detailed, in great precision. So a $1,500,000,000 business at this point, we think is very much where we are right now and there's a substantial chance that we can grow that.

Speaker 8

Okay. And as a follow-up, to your point, Wes, I mean, dollars 2.5 contracted netbacks long term for liquefaction. I think in one of your slides, the implicit was $3.5 effective netback presumed value for FLNG. Is that $2.5 to $3.5 should we just see that basically included in the $7 average downstream margin or do you see that additive in some way over time?

Speaker 2

No, it's actually it's basically included in the margin. Really, we think of the asset is producing gas into our own portfolio. The benefit of producing it over the next couple of years versus the market is well over $1,000,000,000 So if you just simply take the 70 TBtu of production and look at it over the next couple of dollars versus market, it is over a $1,200,000,000 in incremental benefits. So the way I think of the asset that just came online is actually a combination of number 1, $2,000,000,000 roughly in terms of the cost to replicate it. And number 2, just being in business today and taking advantage of higher prices gives you the benefit of another $1,200,000,000 So you're well over $3,000,000,000 in asset value.

Speaker 2

That's how big of an impact that this has on our company, is our book value kind of etcetera, etcetera. But at the end of the day, we view this as an integrated model and the simple way that we've described the business. And in fact, the way the business exists is just simply the amount of production that we have, the 170 TBtu is this time times the margin of $7 that's what gives us the $1,200,000,000 plus $100,000,000 That's the base load of your $1,300,000,000 before the additional growth in Brazil. So it's a greatly, greatly simplified and straightforward and diversified model. There's no lumpiness to it.

Speaker 2

There's no real subjectivity to it. There's not really a bunch of things that we're wishing and hoping and forecasting about this. It's really a business that exists long term contracts to long term offtake with very little credit exposure is the core of the business.

Operator

Thank you. And we'll take our next question from Tarik Kavith with JPMorgan. Please go

Speaker 9

ahead. Good morning. I'd love to get some more color from you guys on how you think about the capital intensity of the Klondike business and sort of how do you think about financing that business over time? We think it

Speaker 2

basically is very little in terms of capital intensity because the nature of the contracts are going to be very, very long off takes to very, very high critical worthy tenants. So it's a very capitalized business and basically one where we will sign a modest amount of capital for down payments on turbines or transformers or things like that, but really down payments. But long term, we think it is a highly cash flow generative business with very little equity capital long term just given the nature of those contracts.

Speaker 9

Helpful. And then secondly, just love any color you can give on sort of when you plan on starting to address the 25s and 26s, your senior notes? I think you've said during the prepared remarks, you had a commitment in hand on the 25s?

Speaker 3

Hey, it's Andrew. Yes, that's right. We look, it's obviously not the best market it could be, but we feel like we need to extend the maturity out and we'll be looking to address that in the very near term.

Operator

Thank you. And at this time, I will turn the conference back to Wes Eden for any additional or closing remarks.

Speaker 2

Great. Well, thanks everyone for dialing in. Appreciate the calls and the feedback and we look forward to speaking to you all in the near future. Thank you.

Operator

Thank you. And this concludes today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
New Fortress Energy Q2 2024
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