Q3 2019 Earnings Call
You can teach and there will be a question and answer session last question. During the session you only need your press star one on your telephone. Please be advised to today's conference is being recorded if you require any further assistance. Please press star zero.
I'd now like to hand, the conference over to your Speaker, Alan Andreani head of Investor Relations. Please go ahead Sir.
Thank you operator, I would like to welcome all of you to the new fortress Energy third quarter 2019 earnings call. Joining me here today are with Eaton Star CEO and chairman of the Board, Chris Jones, Our Chief Financial Officer, and branded Macquarie, Our Chief Development officer throughout the call we're going to reference the earnings supplement that was supposed.
The new fortress energy website today, if he is not already done. So I suggest you download. It now in addition, we'll be discussing some non-GAAP financial measures during the call today. The reconciliation of those measures done most directly comparable GAAP measures can be found in the earnings supplement.
Now before I turn the call Liberty West I would like to point out that certain statements made today will be forward looking statements, including regarding future earnings. These statements by their nature are uncertain and may differ materially from actual result, we carried you to review the disclaimers in our press release and Investor presentation regarding no.
Financial measures and forward looking statements and to review the risk factors contained in our quarterly report filed with the FCC now I would like to turn the call over to Wes.
Thanks, and thanks Dominic.
Oh, My summary, and hope that the presentation. So.
Yeah, we had a very good core and my Q3.
Our focus as we continue to build undeveloped.
Just to get our assets turned on operating.
Finally markets to explore.
We had another good quarter, Brent talking too much about our development projects, but basically got the focus we have it's very specific.
You to complete the construction and.
Our lives.
The operational readiness.
I want to make up the cost to the bulk of the launch and expect to come onboard for next year.
Please.
Terminal itself is very close to Ah.
I'm pleased to can burn will give an update on that simultaneous with our terminal building footwear has been working on the conversion use five and six or feed into that after point all that is on pace.
Total New York Lessors, I actually thought it kept this year to appreciate people take a look at these other societies and get a chance centsone.
Scale and efficiency, we have done.
Second of all they do those are very specific on television.
The subject to participate to continue to grow and develop new markets new terminals for US we had very good progress there having them discussions on three different chemicals in markets, where we think are likely to convert.
60, 90 days and many other discussions around the world.
Plus locations, we've identified has been interesting and actionable for products.
For the transformation of our company from an infrastructure development company She's infrastructure operating companies, there's literally days when equation. So we've got please turn to page one Oh, what I'll do something one cents out last night the Lumpiness briefly.
Developments are nearly complete Barbara.
Using gas incrementally as its contribution processing at Brown will talk about that specifically the plan, but we've been building again I'll go first.
First fires in the gas electric system, they managed to keep it up with my first afterwards.
I appreciate.
That's actually been going great the the trouble readiness.
Rico is nearly complete Mexico is a full construction site expected to be operational by August 2020.
The new a couple pipeline.
There was no the.
Backlog is substantial we've got two large deal for you.
We do expect you're trying to find any limits and I 60, 90 days, how the scale those combined on their initial volumes 1.3 million gallons.
Return on Sunday from a trip to.
Asia, albeit a little later this week on from two Central American South America.
And it actually got back to Africa, there's major markets around the world is a lot of running around the person lucky so very very optimistic that or.
Business is well positioned sacrifice.
One thing that sponsors on.
Amanda Asian demand aggravation, very simple terms, it's like life wasn't business and a lot of drugs and all the more detail, but simply put it is.
The pleasure to build a feature is going to come a building a reasonable return to enter a market and then aggregate demand from other power users small scale commercial users and then lastly, an area. We think has tremendous promise the transportation sector, particularly shipping side use those jobs.
For your construction business you want to.
Oh, sorry money filled in the short one perks and don't use or if you want to make very substantial returns build up to one purpose needed or 234 or more so machine ample evidence and how this really works in progress I'll walk through that cycle.
Lastly, a refinancing or probably finish continues to face we have no very good.
Progress on that Chris talked about that labor basically the goal is very simple one we tend to continue to raise capital against our assets as they become operational and I think circulars and cash flow and do so sufficient quantities and a yield to allow us to internally. The golf. All these projects are our board without having to go to market anymore.
So I can say there were some extraordinary circumstances.
As a company, but based on the business that we have in hand, and the financial ability of our balance sheet and Charlie Finance everything is fine.
I'm more confident that work for.
For the man totally clean affordable fast power gigantic market opportunity, we're gonna have imposed at all sorts.
For me or something three.
This is a map of Jamaica and took its a great illustration of the aggregation once I was talking about earlier you know so our first entry point to make it was 2016 at the top of the was built the terminal do they want to go back to service that first hundred 20 megawatt power plant.
From since that time, you could you expand the Ronny Gal, Alan and what the power sector industrial into a handful bar industrial customers on our last month transportation on the bus sector. So do we think on publishers.
But to flip to page or you see kinda graphically. How this is actually add it up so the bottom we show.
The pretty happy there was joking ounce per day the markets. There's no natural gas is used for use purposes in Jamaica. We started out we didn't have the one dot and the math is for speech, which is up and I want to go back.
Today, those thoughts of have brought a worldwide. So we've gone from 300000 gallons per day to 1.2 million gallons per day, we think that the future is a two plus nine discount that the market.
Do you look at page number five we looked at the three places we our kids business or was it gives much stuff, which make up Puerto Rico and Mexico.
Volume was 1.2 my youngest on her thousand gallons five or something else a total of 2.6 million gallons across those hooked up the pieces of our core financial projections yourself for next year, assuming no additional brokerage course is not.
Indiscretion wives. These are specific conversations are you had with very specific accounts, but at the other 1.5 million. Those two added to just over 4 million gallons per day and that compares to 19 million gallons of Addressability those markets. So only about a quarter or definitely job of what we think its potential there and when you are taught.
The position he told me infrastructure to provide whole logistics are supportive elder marketing and everything else in two to back to back up your your operations your ability to outperform.
Outperforming the competition is significant.
Page six charging showed you asked a last quarter is basically the path to Oh, two cash went on these assets.
You can see we're getting modest amounts of cash for now and then Q1 Q2 Q3 and based on your fully ramped at that point for the.
By the second half a year or.
So before we worked on their earnings call. We have our engine. We are we're literally days away from not being the case stuff turned on.
These are base numbers. These are not expected numbers from what we think watch it happens from a forecast muesli number should people do.
Significantly better yes.
Second half of your there's a gap between identifying new investments that have never actually getting built and then turned on so.
Second half of your and then 2000.
41 issue, but we think that the the backlog we got this just to get started before so.
Lastly, just go to second from a terminals and what we think I'm just like context field offices. So.
Terminals are completely order construction.
For the map of the world below what we've done is highlighted the 10 areas and we become interesting those represent 50 countries approximately in need of fast and affordable clean power that translates into roughly 100 potential travel sites worldwide, our goal and very simple terms.
By the end of next year is to be fully committed and or building man or operating can jump. So.
Currently we have three that are operating <unk>. What are you starting on every day is one under construction in Mexico and discussions three so our goal to get the Ken I'm not.
Significant stretch based on what we think the market Oh, Illinois.
Just to make it very simple thought a return to kick off of what that would do you foresee flip to page nine.
Do you target by was the first time in all.
Oh, the range of 1 million to nine three nights, a one to three nine which we think it's consistent we look at the behavior in the covenant for usage.
By that time, just 10 terminals whole operating margins consistent with what they are right now you're talking about generating EBITDA for the company between one and $3 billion. So again, a very simple terms, if you're able to say.
ER complete it is the development of 10 terminals committed by the end of next year fully operational by the end of 2021 at these farms have company that has been able to generate run rate EBITDA actually lived up to one of $3 billion. So the especially in illustration, obviously, we think.
The marketing substantially greater than 10 terminals. So he is a good short term I'll focus use our wish I could become so that was really triumph group. Thanks, well. Good morning. Thank you all for joining you I'm going to refer to page.
No.
[noise] 11.
So as what's kind of indicated earlier is a key developments we have there will be operational in 90 days.
All Harbor, Jim also CHP plant and the Puerto Rico facility.
For all Harbor, we expect it to run rate by the end up this year for the democracies P., we expect to hit the run rate by the end of Q1 2020 and to the San Juan Puerto Rico facility, we expected run rate into Q1, 2021, I'll flip to page page 12, Kinda give you more detail on that.
Oh, we had a very productive quarter with our terminal project is progressing on pace to deliver as expected.
80% of our committed volumes come from five project.
First the both power plant, which is served by our Montego Bay terminal, which is operational today, we have committed volumes of 310000 gallons per day expected volumes North of 340000 gallons per day. The initial 120 megawatt may slow demand has grown from 150 megawatts on since the time that we've started operation, which we think it.
They do have a terminal will kind of behave generally with the based demand growing after we actually put the terminal in place.
The second after we have is the old Harbor power plant, which is owned by Mirror Benitez partners and served by the offshore facility Animal Harbor that facility is that power plant is operational today and with committed volumes of 360000 gallons per day expected volumes North of 380000 gallons per day, we expect this that that is run rate.
Bye Bye this month, the underwritten hundred 90 megawatt power plant, we expect to be closer to 210 megawatts. So again outperforming the initial expectations expectations. The third asset. We have is that your macro power plant, which we own and served by our offshore Terminable harbor that in the commissioning process and as Wes mentioned earlier.
We first fired that October thirtyth and as of today is providing power to the grid, we expect that to ramp up over the next 60 days educated run rate volumes about 285000 gallons per day before that that we have which of the San Juan terminal, which served to San Juan five and six power plant owned by private it's being convert.
It is the conversion is in process and progressing very well. The first 220 megawatts. We expect to be completed next month. The second 220 megawatts. We expect completed in January and we expect to hit our run rate volumes. There in Q1, one full quarter from what we talked about last time, we spoke the fit that.
It is 105 megawatt power plant owned by US and we'll talk to serve buyer profile terminal construction in progress the first turbine as big as we did a trade that ship. The site. The second turbine is almost complete and we think we'll add third turbines to that facility and increase the overall output to about 130 megawatt.
First gas is expected in Q3 of next year, we have a large and growing pipeline behind that is west mentioned earlier, we're highly focused on several large scale projects that we expect to commit to here shortly uplifted page 13.
As was mentioned earlier one of the key aspects of the business and a huge growth driver is our demand aggregation strip search term rules should we thought it would be CIT for which we aggregate demand across power industrial and transportation sectors. So our small scale distributed power business is a key driver for four for the business overall.
So today, we have 15 projects that are operational in the team has turned on six new customers 63 of 2018 their 10 projects under development. All are expected to be completed in the next hundred 80 days. There are 126 projects that are in discussion and we expect that 50 commitment by the ended the year with over one half of those volumes.
Puerto Rico, so what that means that there will be a total of a million plus gallons per day committed volumes flip in discussion volumes, which is an increase of 25% year over year.
Now I'll see if you think better operational and financial performance this quarter.
As an operating business, the health safety and welfare of our people stakeholders the environment as a top priority as it always has been for the quarter. We continued our record of no HFT operational incidents, which include zero days away from work your reportable from health or safety process event in zero stills or environmental containment losses.
On the asset side, we had 99% plus availability across the operating assets, the 99% availability across a reliability across the operating assets overall extremely strong performance from the operating theme and we continue that just to get better overtime. What we're probably most proud of is we have almost 5000 LNG truck rail to ship transfers.
Without incident, we have the most shipped to shore transfers of any company in the Western Hemisphere, all without the incident, which is a huge vote of confidence for our team in place a big branding event for us for our counterparty now I'll turn it back to west for gas and shipping great. Thanks.
Then asked a lot of questions over the course lobby can four months about the gas markets. I think you look at the aggregate numbers on the supply side is actually only done a modest amount of supply increase so.
We see from the stage 389 million tons rising to 440 million tons of capacity is only up about 50%, but this is a commodity but it's very hard to stores. When you make LNG you need to find a place to put it theres not a lot of storage for and so even a modest increase in supply can cause of Charlie.
Got it actually to price that's exactly what's happened so gas prices spot prices down roughly 50% over the course of the year.
When you book supply demand technicals, we think of it is it is fairly soon to add.
Hi.
That is fairly easy to add.
Trains and bringing capacity online. So the said they they tend to add supply and 5 million ton increments.
And the demand side to get sold basically one turban at a time.
So we look at the overall markets and we think the prospects off in the business I do think that those two trends will catch up in reverse themselves. Because we think the overall demand worldwide is going to be very very substantial growth in our power businesses kind of is that.
2020.
Now all about 50 days away and with that comes the 2020 low sulfur fuel guys.
As usual.
In fact, as you know the shipping industry not immediately but over the next handful years, even see the what's happened in the short term is this very modest increase and who supply is caused fairly substantial change in price and that's one reason as to the opportunity that we have which is now to go we lock in a few volumes for an extended period will be for very good price.
Since we've been running a tender for the last 45 days or so 10 different people that have tended for we have a number of very competitive suppliers are just finalizing the selection of who we want to go into what the terms of that might look like we expect to complete that by year.
Gross yeah, great. Thanks, Wes good morning, everybody turning to page 17, let me take just a quick minute to walk you through the financial performance for the business for Q3 compared to Q2 Q3 volumes were down slightly in that was due to the planned maintenance outage at the both power plant.
This will rebound and we expect around 600000 gallons a day for the fourth quarter.
Despite the lower volume so ever both revenue and expense were higher for the quarter. The increase is due to about $10 million of construction revenue and a corresponding 9 million dollar and cost of sales related to improvements at our customer facilities.
This will normalize as construction concludes and the terminals come online contributing the net loss for the quarter was approximately $8 million in noncash stock comp at about $16 million of cost associated with the development projects in Pennsylvania in Puerto Rico, there were non capitalizable.
A quick comment on SGN, a we expect this to level at about $20 million per quarter. After working through these onetime events.
On the balance sheet debt went up in the prior period associated with the funding of 117 million of the $180 million facility on our two Melco CHP plant.
Cash was flat from Q2, but we spent as we spent about $80 million on project related expenditures during the quarter.
Repeat something that we said in Q2, which is the cash on the balance sheet plus the undrawn amount from the NCB loan fully funds all of our committed projects.
Turning to page 18, this outlines our plan to use leverage from operating cash flows to finance the business and the key steps to accomplishing this or the one turn on the assets and to source low cost LNG.
As there are assets go to being operational the financing Pat changes substantially our goal is to borrow against the operating assets once their online which in turn funds the development projects as our performance proves out we expect to be able to borrow more funds the didn't even lower cost of capital.
Further we expect the double the amount of debt on the business from the IPO, while holding the overall cost is that flat in order to accomplish this we expect that we'll be able to increase the size of our term loan for $500 million to $800 million, which combined with the cash for locally in Jamaica is a total of about $1 billion in debt.
The bottom of the stage if you look at the graph the operating margin on run rate goes from $169 million to over 380 million in the next four quarters using this operating margin goal and applying three to five turns of leverage implies the debt capacity of 1.1 to 1.9 billion.
So we think that starting at 800 million as a reasonable step in that direction. We've had a number of discussions and putting that facility in place we feel confident in our ability to do so over the next 90 days.
In conclusion, we intend to use was views leverage to accomplish our goals I will note. However that once we hit the goal of 10 terminals will have more than enough cash flow from operations to fund growth.
With that I'll turn it back over to Alex.
Operator, you May now open the call to questions.
Thank you as a reminder to ask a question do you want me to press Star one on your telephone.
To withdraw your question. Please press the pound key.
First question comes from the line of Devin Ryan JMP Securities. Your line is open.
Okay, great. Good morning, everyone I'm in some thanks for the update obviously a lot going on here. So I guess first question when I look at slide four on the progression of the business in Jamaica, you know it seems to be a good case study for development in your other geographies and I appreciate that developments not always going to fall into.
Kind of a smooth timeline or something that can occur faster or slower, but you know it feels like maybe some of the development in the quarter was a bit slower than we had modeled.
So just want to think about maybe Jamaica as the case study here, whether you saw some similar developments there.
I appreciate your not building the business for one quarter. It's it's a long term strategy here, but just how Jamaica and then the timeline there.
Really just the overall experience there you know effects kind of your view today above kind of the development in the rest of the geography is that you're in.
What we look at a page five where we actually detailed market size for each one of the geography.
Jamaica our estimate.
As a very granular.
As.
The three kind of.
Elements of power.
Small scale development and transportation for market size of 6 million gallons per day.
That does not include significant volumes for the shipping business.
Maybe a different geography of generic himself.
I touched on earlier, when I said I thought that the other shipping stuff would be.
We have big thing for us.
Some context.
Every ship that is an LNG powered ship owners containership or tanker ship you something between 15 70000 gallons of LNG per day.
And then as a essentially a 365 and they out used utilization.
There's tons of research data articles about the viability of LNG versus other forms of fuel and there's no doubt in.
In line.
And increasingly significant role over the course of the next couple of years, but in these these are picking numbers were looking somewhere at the domestic volumes alpha that the or do we recently.
Centralized all of our small scale development with one team that has local teams they have that.
David in July at over 100, plus customers between each one of these locations that.
News currently in some form of discussion for that and while it does take some time to get from here to turn it on we have done to catalyze this as we listen to provide all the development capital for our customers add to the extent that we can't we also provide the operational capability for us to step up and actually a complete the projects because somebody I agree.
To do it is not as helpful. As actually having US then step and help them with all our capability. So let's say that our perspective is that just pardon Mark was 100 plus.
Customers on the small feel side between these three markets is going to be material addition onto the business is very high margin business and the already paid for the infrastructure.
So for example, I was with a big resort on or about two weeks ago always there electrical bill and one of these markets $250000 per month and it to convert to CHP with our operation our prices would reduce that $250000.
Well I, but over a million dollars year still very good margin business for us still a very very positive impact in the environment and very significant savings for example in their current to resort and their growth plans for it. So small scale business. I think is really the this is part of the demand aggregation I think it's the secret weapon up that business is definitely a ground.
More and that it's a day by day believes to go after each one of these companies, but we feel like it's going to be updated contributor to our numbers going forward.
Great. Thanks, very much I'm, just a quick follow up your Wes on the LNG pricing and with respect to the 550.
How much.
Can you or will you secure at that price and then what duration or you guys looking at based on I guess your comments on supply demand and expectations for kind of longer term pricing there.
I think that we will end up with 80% to 85% of the visible demand on day, one is probably more thinking about right now.
Okay offers and five year seven year in tenure I think at this point I'm, probably leaning more towards the tenure solution I think thats, probably the right. Okay. We think that the amount of LNG there were securing here as fractional compared to what we will be using as these terminals at all and other new terminals crop up but this is an important step for us we think again.
Real viability to our financial plans, what we're trying to accomplish passing side to lock in this part of it gas and chefs collectively are roughly 85% enroll times. So those two things so I can be locked down our significant parts of the puzzle and.
As I said I expect we'll complete this by the end of year.
Great. Thanks very much.
Thank you.
Once again, ladies and gentlemen, Navistar one to ask the question.
Our next question comes from Greg Lewis with BTI G. Your line is open.
Yes, Thank you and good morning.
Just just following up on the last.
Question about the 550 as we think about the cost of LNG and third quarter. You know you called out that it picked up kind of related to some you know I guess, maybe some trains and cost.
As we think about that 515 number I'm realizing that it probably isn't going to happen overnight.
How should we think about the scaling down of the cost of goods sold.
Over the next few quarters are few years.
I think our expectations were going to have the 515 number at run rate business next year. So whatever the number we have to be [laughter] solve some of the spot 25, or so tight bandwidth side.
And.
Finally, our expectations will be able to.
During that LNG in Dallas, and even as you realize that in our run rate numbers, starting next year. So hopefully the fourth quarter, you'll still see legacy.
LNG prices and then the first quarter question go back to this number which is that's that's our goal so.
Okay, Great and then the other comment that.
Seemed like.
Kind of the you know clearly would IMO and the potential ship the more LNG on the water as we think about new fortress and where they fit in this value chain is this something where.
As we can just build on the existing beach heads the kind of deliver LNG fuel to like how last mile should we be thinking about with the delivery of.
Some LNG into them or anymore.
Like is that just hardware how our terminals yeah go ahead sorry.
Very last I mean.
It's brands that we have completed.
More ship to ship transfers comping atmosphere.
Maybe more should should translate into a company in Atlanta, we really look at a providing LNG as fuel through a ship to ship to ship trends. So we have today kind of approved capability unmatched by anyone frankly in terms of bringing small ships right people's into two other ships. So.
I think our goal is to use the terminals.
As storage vessels.
And use the smaller ships I can show vessels.
Mix shift and other ships over time.
When you look at a shipping math world Walter from ship line, there's a number of very obvious touch points.
We are going to be critical we are providing upside on those LNG logistics those are the points on the map. We're focused on with regard to this particular part of it and I think it may be the kind of situation, where we partner up with different ship owners or different people I've got strategic foothold in the business.
This is a world was a big worldwide LNG across it is a tall order on on individual basis, but important issue with others you something that's very very viable lists.
When we first.
Look at the end package you can have on this looked at our train. The first part we were way back when the Florida.
40 cents railway biggest regional runway.
In the southeast.
Total easily motivation of about 10 million gallons today, so big individual transportation asset that's basically equal to one 5000 containership terms, we have introduced over the course of here. So it's hard to speak about the shipping market studies is further that's developing market, but there's no doubt is going to be begin.
And our business over time, it's something that is complete on model that are known cheeseburger and relevant injections.
But there is not tangible enough, but a number investment to pass on have you all that I feel this really like this is going to be significant element for us I get the you know the company group that has access to the most important logistics. Once it was important terminal is the ones who will really be winner.
Okay I agree with that I'm archive, thank you very much.
Thank you. Our next question comes on line of Devon Mcdermott Morgan Stanley . Your line is open.
Good morning, Thanks for taking my question.
So I wanted to just start just actually following up on some of the prepared remarks and the first question actually looking at the scalability. The platform. Once you enter a new market night I agree that you make is a great example of the kind of operating leverage an opportunity set do you have once you reach first gas in a certain area I wanted to talk just a bit more about.
Puerto Rico Amexco, both being relatively large market opportunities here. If you could just contrast, the competitive landscape, there and how similar or different that might be from Jamaica.
And also within added to get addressed the geographic benefit that your terminals might have versus other competitors in those markets purely for Puerto Rico. When you look at the industrial customers, rather customer base that that might be there.
Well and it's actually very simple in Jamaica, there's no other.
Source supply.
Yes.
LPG Lucy solar loosely field, so I think a lot of the development in these markets.
For energy follow the easiest way of important oil and oil based products are easy to handle these ship.
You know the sang for Unfortunately, we are expensive dirty and Vodafone prices and that's what that's the big picture warm as we see opportunities in Jamaica right now, we're the only source of natural gas and because the largest customer which is utility is our customer for long term.
It is at all or somebody else to step in until the terminal it could have horses.
There's other things maybe do from a commercial standpoint very players.
Perrigo, we think is that similar situation.
There is another 11 patterns and brings in gas, bringing in ISO containers degrading from U.S. mainline and so just a raw cost of shipping is a material.
Hurdle for them to overcome them, we're shifting from our terminal in the goal of San Juan some customers around the island, they're shipping from USBC.
As consumers ownership and so that sounds harden expensive, it's because it's hard to Spencer then for customers not only the cost of the LNG for them. This is a critical must run asset and even power a 365 days a year, Iran Islands are stormy places you get weather events, you get different things that can actually like.
Our supply chain. So I think both in terms of price logistics and certainly as we will do very well.
Mexico market is we look at bought California.
Fixed on there is about half of Venezuela. It is essentially.
There is no source of gas comes down.
As were from California, Theres no sources outcomes across this year Cortez firms over a long already person United So our terminal will be.
The first and quite possibly the only in the.
Near term source of natural gas.
Both for the power plant users in Mexico in Kabul for Sunoco, obviously those are the the resort community. There. So again it was a true vacation spot. Obviously, there's number of very large resorts that are those we think are just going to your customers for so competitively.
They're not monopolies by any means right. So we don't use that word warm really like we went out and we're not from a competitive standpoint, you are very very good competitive position do you see on competition. So they really your competition is just a matter of can you execute how do you actually do to staff. It properly is just works now.
Ashley.
Viability or or actually smart.
Great.
Very helpful. And then my second question is on the two large scale emo use that you mentioned the prepared remarks being.
Closer to conversion over to from commitments is there any additional detail you can provide at this point on on those potential deals what they look like location.
Anything else there.
We don't want to provide a detailed on them until they are turn into binding commitments for obvious competitive reasons or whatnot.
They have been both of those two situations in our hands.
Our product or months amongst the discussion negotiation over cases, where the customers will benefit very substantial advise the reduction of gas expansion. The fuel. So I think that the likelihood that they convert as high as with any transactions I've done until it's done.
But we think.
We think there they're both.
New geographic areas for us their goals.
Have markets there are.
In both cases are substantially greater than into other markets.
But not on the short term viability or be a.
HM.
In terms of initial transaction, but also launching prospects for growth. So as soon as we have finding transactions, where somebody materials enforce and I'm hopeful that will get this.
Couple of we've done the next 60 90 days we've lost.
Great. Thank you very much.
Thank you.
Next question comes from Ben Nolan with Stifel. Your line is open.
Good morning.
So I I, maybe following on the last question, but but maybe not <unk> west one of the things that you'd pointed out was the importance of developing beach has an Irish they have three.
Really good beachheads now, although you elucidated on three others in the past, Angola, Ireland, and Dominican Republic, but it none of those have yet.
Turned into solid contracts is is it harder than you thought maybe two to push those across the finish line or or is there any change in the competitive landscape for you know <unk>, but there.
There are progressing as you thought.
That's really been harder fivek that ER.
When we look around the world that he was 148 gas terminals one for another that our gas importation terminals largest numbers those are in China.
As in Southeast Asia last week for and four days and I'll say this the gas <unk> power notion is one that is not only viable that is now part of it.
And then go to standard process for people to bring new energy power and the markets.
No. These are big decisions five countries were by utilities on companies want to make and there's a lot of complexity that goes into it and so I think in the context of all the things have to get negotiated it takes some time and get from here or there.
No I wouldn't be franchise brochure and we can show our facilities and what they look like water operational characteristics are that's very different than solution our onto what month. So I think look competitive standpoint, I feel really good about our ability to access as Marcus.
I I say that the.
Thought about the business a year ago has proven to be very much the case, which is it [laughter] reducing them a number of.
Competitors that want to.
Provide some aspect to the solution I'd be wonderful power plant, we want to fill the terminal that we want to small scale, we want to provide yes, we still see actually your relative lack of people that will all those things collectively and most importantly people that have the ability and willingness and the wearable.
To build and pay for us and this notion of demand aggregation.
Is the most critical aspect so what I do see a lot of other situations were involved in is the competitors are looking for something which is a you know 25 year or hot water, 100% solution for their entire terminal and we're willing to accept less than that with the notion that will get demand that will add is yet.
End of it has proven to be a very good decision in Jamaica, I think it'll be a spectacular decision, Puerto Rico I think we'll see this over and over so it but is there. There's no doubt is competitive landscape I think one of the reasons I'm traveling 200 days or so this year is that we think getting out in front of these markets are the is look back at the map we provide there.
Countries, a 100 plus locations.
Our goal is to get another three or four or five year I don't think it's a lofty goal and I do think that we're we're fortunate excellent or what we do have the number could be which really hard numbers, so and the math on what happens as those terminals to for the point and filled out the staggered. There's there's really not he business other been associated with where you can say.
I did you do these three or four things generates one of the $3 billion.
And that's not sounds like a.
What we simplified comment, but it's it's true so.
There's there's there's no doubt there's good demand for there's no doubt there is competition, but I still think theres a lack of competition approaches that.
For instance.
Great. Okay helpful. And then another thing it man you talked about supply and obviously prices are pretty attractive at the moment.
And we think we'll stay that way for little while but it didnt you didnt bring up the liquefier at all it could you maybe update us on whats the thinking there or where that stands.
You bet to spread so on the liquefaction side and why loosing kind of saw satellite images aside it cleared level and ready for vertical construction I was kind of put it up for the winter.
We have all the permits in hand, so although those hurdles have been clear I'm everything its teed up.
Or what's the decision would be made to go forward on that project on the other side of it we're working on kind of a few lucent on the export side, but I think our belief is it's a great project economically on a standalone basis, I think as you rightly point out given where LNG prices are in the world I think we'll kind of take a look.
Both options kinda side by side and then once everything lined up for the Liberal part would make that as an independent decision.
There's no no doubt in my mind online, but long term have known supplies and some party portfolios Lucky I.
I guess you used the numbers in Pennsylvania.
With gas prices were talking about the costs of.
In transportation all in LNG price about $4 delivers return so that's still substantial discounts to 550 provides real economic concerns do so lessen as of today just given the the supply researchers the overall market, but over time I think we'll definitely a report.
Just as it has to happen Tomorrow I think.
You know the five tons of the times are winterbottom. So those those two factors.
Package not reverse themselves we saw him soon but.
Tourism or so.
Great.
Lastly, really quickly for me Chris is there can you maybe update us on the Capex program and if there's been any changes there like I I think you mentioned, maybe adding a an extra turbinen the pause, but or how should we think about capex going forward into 2020.
Yes so.
That's right rented to say that we were adding a third turban in deposits increased capex way about well over $20 million, but as we look into 2020, there's really no change except for that 20 million. We spent on as expected. During Q3 Q4 is looking to be on exact basis kind of we were flashing in previous quarters. So.
I'm going to really no no major change been from a capex standpoint, as we look into 2020 everything will be fully built with the cash on hand, plus the 63 million remaining from the NCB facility.
Great appreciate it thanks guys.
Thank you and then next question comes from Craig Shere.
To my brothers your line is open.
Good morning.
Two questions.
Did I hear.
<unk>.
Yes.
Not yet to be expense.
Yeah, I think you're talking about development expense, it's very difficult for me to hear you I apologize, but yes, we had $16 million of expense during the quarter 14, and a half of which is related to Pennsylvania in about a million and a half is related to Puerto Rico. Those are costs that are just not able to be cap.
But lives under accounting rules. So as you make site related improvements in Pennsylvania. Those those costs are actually running through the PNM through SGN <unk> for Q3 2019, that's why you see kind of that number higher quarter over quarter as we look into Q4 in into 2020, we do expect US you need to two level.
Out at about $20 million quarter.
Great. Thank you and I got a little longer question about Mexico.
If I understand that.
So turban out the Mexican plant the third one.
Just increases fuel off take by mitigating maintenance that would happen on the first two turbines and also providing some upside for new commitments.
In addition, if I understand correctly, the pause turbans or kind of quicker bill portable generation units that maybe up 9500 heat rates versus more efficient stick built stuff.
So I got some questions on this one first.
Yeah, it's a little easier to construct a modular generation.
How does that kind of play into the one quarter delay from the second quarter <unk> kind of guidance.
Coming on line also how long is the duration of the original CLC <unk>.
Oh, how easy is that the market generation capacity on the peninsula and I guess I'm looking at slide five that seems to indicate you're expecting nickel and having 50% marketshare.
And why did you go with modular versus perhaps more expensive.
But more efficient stick built.
And finally, our their prospects to economically tap spare Baja California, sore LNG terminal capacity.
Oh for fuel needs on the other side of the Gulf of California.
Yes.
So this is [noise].
Brad Let me just.
Just to try to answer your question, what sort of going a little bit reverse order.
So I think the first question essentially a bit here question, it's kind of why modular why simple cycle. You know how does that kind of relate to your market strategy. I think as you know west has pointed out a number of times.
The approach in low pause is simply a speed lower capex and then as you rightly point out the heat rate is higher but you've got to remember in the market you're selling in the prices, maybe 17 to 25 cents, so even with our cost of fuel and a simple heat rate or simple cycle heat rate.
Still the cheapest generator around but I think more importantly, you're talking about building something within 12 months and to capitalizing on a sort of need for power in a market trend that's immediate and so what we kind of finding these markets is a solution now is worth a lot more than kind of a solution maybe never so I think that.
That's the first part of it the second part of it is I think generally as the market strategy that we're seeing in a lot of these locations. This is exactly the solution that people are looking for because the capex is roughly half of what you would normally expect and given kind of our landed price of LNG and the competing price of fuel in these markets you.
Our general generally speaking.
Not the best and most efficient generators certainly within the top two or three and then I think you know as it relates to the opportunity for capacity et cetera.
Mexico market looks very similar to other markets and if theres a need for power Theres also a willingness to pay a lot for capacity. So we expect for this particular asset to be very lucrative in the capacity market itself and I think generally speaking what we expect is landed gas with the power plant there.
Also give you an opportunity to sell gaskets CFP for other potential locations and so you'll gasify the peninsula with the only ask that it's really around so funny way you know the boxing and so it looks a lot like to make it looks a lot like Puerto Rico difficulty in Iowa, and so the first person that can plant a flag will kind of take all the territory.
Great. Thank you.
Thank you and your next question comes from the line fired units, what's kind of Citi. Your line is open.
Good morning, everyone. Just a few quick follow ups. Once you mentioned getting to 10 terminals I think by the end next year, I imagine, Angola, and Ireland or probably part of that assumption, but just curious what makes up the remaining for and I realize you probably can't be country specific but if you could talk to the region and then also what sort of Baseload demand are we talking about is the power data center.
Reserve or something else.
I cannot predict where are we specifically I can tell you when you look at the map.
Obviously Caribbean very good [noise].
I got in Puerto Rico, and other islands.
A bunch of different initiatives on the smallest government.
Substantial area.
West Coast in Mexico, where we are you.
That does conclude will be.
So given terminal force there's other parts of Mexico. There are also strengthened.
Wait pipelines can be significant.
Around Central America, and once you move into South America focus those west coast, there's a number of very interesting.
Respective opportunities and so I feel like we will definitely end up.
In South America in some way shape or form the next 12 months.
And then when you go to Africa, no virtually every country. This on the map.
Needs in excess of power and these cash for the industrial so it's really hard question.
Is there a demand as a question of how do you translate what's the logistical package from there I've been to Africa.
Five times this year and I'll be there again in two weeks. So 10 days. So obviously guy I think there's a big opportunity there.
Southeast Asia was the country last week was 69 people and they've got roughly 1000 megawatts of operational power southern.
Well again big picture.
Each makers use about 110th as much electricity as people know states do when can you use a onetime as much electricity, which make it so it's really hard to explain the opportunity.
Kind of.
Relatives excess assesses numbers, but I feel like you know tomorrow or less I can say this I think that there are.
Seven or eight countries that we think our most from for the solutions, we have an operating the broadest fees demand potential across these three.
Aspects and business.
And I feel like the likelihood that we convert to a handful rose is pretty good.
No we're not.
We're not looking to stop and 10 terminals Im just trying to put out a metric we can sometimes achievable something is a focus for us and we'll go see the next 14 months I would do but I think that based on different conversations you've got and engagement, we get on yes, it should get a little bit easier every place you go because you've got that much more credibility we have done.
And now were brand new seating.
Development sites and my dog so.
Small field force, we have many many examples of where we're able to new customers.
Those are the kind of proof concept.
Factors that difference so.
Got it understood second one just on the Liquefier bring it back to that I believe Chesapeake was your baseload supplier there and so just with respect for recent gone concern disclosure. They provided last week does that change the strategy at all around the Liquefier and maybe how you're thinking about supplying it in the basin.
No I mean, they they've done a terrific partner for us as we try to.
Pursue this development in Pennsylvania.
Obviously, we pay attention to their developments financially so tough market. We're drilling there. She asked so obviously, we suffer from that but we think there's a lot of iron ore base right place geographically MMCC, we feel really good for us.
Yeah, and one last one if I could just with respect to the terminal financing, Chris I think you mentioned wrapping that up I guess in the near term but.
But of course, you're not really hitting that higher run rate until later next year. So I guess, just how should we think about your ability to pull on that expected liquidity is is there could be some sort of accordion feature and there's the earnings grow and then just more broadly I guess, what you would define as the appropriate leverage target for the business in general.
Yes, so I mean, the ramp happens very quickly over 2020, so with the facility we expect to get done like I said over the next 90 days. So hopefully we'd love to fund that a you know December January timeframe and lenders have given us term sheets. So we're evaluating now in trying to piece together the best.
Solution for the growth of the business, we do expect to fund the 800.
I close so it's not like a it's it's an accordion or delayed draw I think people are believing in the numbers and the cash flows that we're projecting and that we're going to be the key to building out the future developments.
Got it and it's in terms of the leverage target where would you got about it.
I'm sorry, so again just in terms of a long term leverage target how do you think about what the right areas for the business.
Yes, so we've talked a little bit about that in the past I mean, we really think modest leverage on these assets once their operational is appropriate while other under development, we want to fund with cash on the balance sheet.
But what their operational you really do have a lot of opportunities to finance them, we think that our goal or it was I think our goal is to become an investment grade company and that's the plan that were working toward.
Understood. Thanks for the color.
Thank you I know next question comes from the line of Jon Chappell with Evercore. Your line is open.
Yeah. Thank you just two quick ones, Brent and maybe for you. If we think about two buckets of growth.
Being the 1.3 million gallons per the two large scale and we'll use but then also the 1.5 1.4 million gallons from the in discussion terms with kinda, Jamaica, Puerto Rico, and Mexico, None of those I think show up in your 2.6 million run rate for the fourth quarter of 20, so realistically.
Then you can address each of those buckets separately when do you think that those could realistically come online and hit run rate is that Super early 21 or is it kind of further into the future.
Yes, So I think first of all you're correct.
The two things you mentioned are not showing up in the numbers were showing but I think our expectation is that those those items will show up in the second half of next year.
Yeah, I mean, the new terminals.
Well, probably 12 to 16 months.
All the new terminals so.
We're doing a lot of free.
All that we're on.
Is that will be there, perhaps another shoretel summit for new terminal 12 to 16 months, Yes, just right.
And for the small scale stuff, though some time of human Patel turn on its probably on average about five or six months, where we have about yourself. So I think in terms of volumes for next year those small scale.
Customers and we can bring on first half year, you could see volumes turn into gallons use the second half of your bigger developments in 2021.
That makes sense. So and then if we just think about kind of the evolution since he became public and in the operational you know prowess. If you will you're still looking for the same run rate.
Other operating margins much higher or volume in Fourq you Tony as you said six months ago. When your first quarter earnings call, but it seems that the ramp is very much more backend loaded.
The in May I think you were looking for kind of a 1.9 million gallons by the fourth quarter of 19, and now you're looking for 0.6 and an operating margin a tool to a one run rate just six months ago by the fourth COVID-19, and now 36 that he just speak a little bit about is that customers not being ready is that operational hiccups.
That we're kind of unexpected what's the reason for the much more back end loaded guidance range. If you look over the next six quarters.
It's really just the noise.
No a month or two slippage on construction projects. So these are projects. Most part are very much you know as we find the fun time very much on Friday.
Yes.
Whether that amongst the delay a ship.
Well, it's a loss on so we are frankly, it's not that different rebuilding and office building apartment buildings industrial or you can get some slippage in terms of construction so that.
Actually we point out that's a different sort of quarter or so but these are assets, we expect to be highly productive for decades, and some movement of a month or two was material reporting periods were public company reported a quarter in the context of really the utility these assets cash flow generation of there's just no ones.
Okay.
Thanks, Mike Thanks, Brent.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back to Alan internally for any further remarks.
Thank you all for participating on today's call. If you have any follow up questions feel free to reach out to me, Josh cane or Jake Suski or contact information is on our Q3 press release. Finally, we look forward to updating you. After Q4. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.