Q4 2019 Earnings Call
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Ladies and gentlemen, thank you for standing by welcome to the.
Sure NFI fourth quarter employee earnings conference call begin momentarily. Thank you for your patience and please standby.
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Ladies and gentlemen, thank you for standing by and welcome to the NFC fourth quarter and full year earnings conference call. At this time all participants are in listen only mode. After the speaker presentation. There will be a question answer session asked a question during the session you'll need to press star one on your telephone. Please be advised that today's conference is being recorded.
For any further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today Alan Andreani. Please go ahead Sir.
Thank you operator, I would like to welcome you all to the new fortress energy LLC fourth quarter and year end 2019 earnings call. Joining me here today are with Eaton's, our CEO and chairman of the board Christian to our Chief Financial Officer, and branded Mcelmurry, Our Chief development officer throughout the call.
Paul we're going to reference the earning supplement that has been posted to the new fortress energy web site.
In addition, we will be discussing some non-GAAP financial measures during the call today. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement.
Now before I turn the call over to Wes 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 uncertain may differ materially from actual results. We encourage you to review the disclaimers in our press release Investor presentation regarding non-GAAP.
Financial measures and forward looking statements and to review the risk factors contained in our quarterly report filed with the FCC now I would like to turn the call over to West Greg Thanks, Alan and thanks, everyone for calling in.
Earlier this morning.
We posted a presentation on the web page.
A few minutes ago, and that's going to referred to as we go through so you want to pull that happened and fall long it'd be great on the start with a page for Q4 2019 highlights goodness is there's lot of highlights.
Pretty much never expect it was the best quarter that we've had been a public company we.
Reported positive operating margin and our assets for the first time Crystal walk through that in some detail, but as I said last quarter. The transformation from a development company building stuff to an operating company running stuff and generating revenues is very much underway a positive operating margin in the fourth quarter substantially more in the first quarter second quarter B. Riley.
Until the full run on the assets that are under operation and we are well in the past being very very cash generative companies that's great.
Thank you Susan permits.
And then slot.
Here and then as we announced about 10 days ago, We signed an agreement to build new terminal and associated power plant in Puerto Sandino, Nicaragua. So our fleet of terminals base expands from three to five with a very substantial pipeline behind and I'll talk about that in the second.
Number four LNG supply has been a big Big news item for us.
The the path the company as we've been very focused on securing downstream distribution for our assets. That's been our focus as we get those assets online then look to lock in long term supply with all the good news we've had a development side. It was right time to to step in and do that LNG prices have.
On precipitously in the last 12 months down 70% of spot basis long term basis down as well, Chris will talk about that and in some detail, but we did step in by about a billion dollars or the supply here at the end of January.
More to come there were still net net very under supplied which is good news in this market. It gives us a tremendous amount of upside lastly, the plumbing the on on the financing side, we refinanced our debt.
We basically increase the debt facility from $500 million to $809 extended three years did it basically under the same financial terms very much now on the path to the capital structure that I think as the appropriate one for the company will eventually be some combination of corporate debt and secured debt. This is a very very good step in the right direction for.
As he has all the capital that we need on balance sheet without having to access equity to to build out all the stuff that we've committed.
So just really briefly that's just revisit with the business as a flip to page five.
The business is is a terminals business, we develop and operate a global portfolio on this terminal infrastructure. It is really the the cornerstone of our business.
Focus on those areas of the other world that have to characteristics one.
Large populations and growing economies number two we have inefficient and how did it infrastructure.
Those are very simple criteria, they apply to a big chunk of the world really our bar business for the most part is outside the developed markets you can see from the concentric circles that we've got there. We obviously started in the Caribbean Thats been a big focus for US recently moved into Mexico In Central America, South America Africa Asia. These are all markets where we.
Very actively having discussions right now I think is not long from the day when the Sun want sat on our our fleet a terminals around the world. So it's a big big focus for US we know that once we get the terminals in place piece of the portals allow us to bring LNG and most importantly power in these countries around the world and that's the that's because thats the focus of the business.
Theres number six we show you more specifically, where what the geography looks like so you can see the Caribbean. We've got the two terminals in Jamaica, the one terminal in San Juan Puerto Rico, the two under development than in the past Mexico quarter Sandino.
It's a it's a it's a great constellation of assets, thus far and we're far from far from really being done the numbers that I pointed to in the right hand side of the page that are relevant is that.
With the three terminals and our operation are committed volumes right now a little over 2 million gallons per day capacity 9.4 million sort about 21% of it is actually use so we generate high margins, we generate a lot of cash flow. We saw a tremendous amount of growth organically in those assets below and you look at the committed portfolio an overall.
The numbers basically stay the same so were roughly 20%.
Realize how the 16.54 million in capacity and that our committed volumes have gone up substantially the pipeline is extremely robust in sale values and.
So overall it is in a lot of.
Clearly words about it I can just tell you that.
The business has never been more robust for us as we have developed these existing assets have shown proof of concept have shown that we can actually deliver we want the Sean literary rooms off the hook with people that are interested in having this common talking about solutions for their countries.
Page number seven lets just walk through the math is actually very very simple.
Our goal and I'll talk about this more specifically in just a minute, but our goal is to develop a portfolio 20 plus terminals around the world. If you look at the box in the lower left hand side, you can see that we've got to circles. There so that 1 million gallons per day.
It generates about 25% operating margin at 3 million gallons a day those margins increase it's kind of the murders principle of terminal. So the bigger get faster is that makes sense to you, but we look at these terminals. We believe that each one of these markets can support something between 1 million and 3 million gallons per day. Those are those are abroad.
Numbers, but it's a good illustration of what we think actually can do that then translates in the right hand side do very very substantial amounts of cash flow. So a portfolio of 20 terminals generating one to 3 million gallons today, we generate between two and $8.5 billion in EBITDA. So very very substantial amounts of EBITDA, what I would point out is that while these looked like very.
A big numbers and they are we are fivetwenty as of the way there. So we're about a quarter of the way there. We've got a pipeline of about eight different terminals are in discussion right now with a long long list of other markets that we think are applicable. So this is our which is that the goals that we focus on from an economic standpoint, the short term, but well down the path to achieving this.
So page eight the uptake.
Going to turn this over to Brian just one second this talk about the of the developments, but basically the these four customers represent 90% of our average committed volume for 2020 to both power plant, which is the first plant that we converted the old Harbor power plant, which has recently converted Jim Alco power plant that we when CEO Dion just two days ago, Mis and one power plant, which has been.
Converted right now and the terminals completed so lots and lots of good progress on the development side. What this means to us and math is very simple if you look at the bottom of the page.
The goal is to generate $250 million a committed operating margin in Q2 2020 growing to $450 million based on existing committed volumes one for the sandino and the pause get up and running so 250 going to fourfifty over the next year. So ill give you my two cents on how I think about valuation of this so far.
And $50 million less $80 million in SDMA, which is about what the number is $379 15 times multiple which I think as the is the right multiple to start with on EBITDA multiple that's still going to have billion dollars enterprise value, taking $1 billion net debt in the afford a half billion dollars and valuation I divide that by our 100.
68 million shares as $27 a share so with no growth whatsoever other than just executing our existing business right now, it's a doubling of our stock price and I think it's just the beginning so that's something that we'll talk with analysts about top and ended the investors about individually, but I think that as we now transform into the positive cash flow and these terminals get on I think that.
Our upside and valuation standpoint is significant.
Lastly, before I turn it over to the other guys was just talk about our goals. These are our goals the company and Theres two very simple things that are they are both.
A manifest in our in our in our business day today, one is what I mentioned before has become the world's largest IP. So the world's largest producer of power outside of the developed countries 20 terminals was one to 3 million gallons a piece. So 1 million gallons of days about 400 megawatts of tower turn that into power for the overall portfolio Thats.
Eight to 24 gigawatts to to $9 billion, an operating margin big numbers easy to follow pretty simple unit economics, and something we should be able to update you on a quarterly basis in a very very simple. Thanks.
Second and this is a big passion for me is a new goal for ourselves, which is I want to be zero emissions as a as an operating company in 10 years today, we deliver low carbon natural gas fired power substantially better than oil based power obviously much much better than coal based are huge step into right direction is still based on the fossil fuel tomorrow.
Now we aim to be the world's largest ITD entirely emission free will talk about this at the end of our New initiative. This is is called zero.
And ill.
Asked about what how how and why we intend to get there isn't audacious goal. The one that I think is very very achievable and I look forward to challenges, but that in the second but first let me turn over to Brian Yes, great. Thanks, Wes Good morning. Thank you all for joining us I'm very excited to go to update you on what we've been doing over the past quarter I'll refer you to pages.
11.
We've had a very productive quarter as well as mentioned earlier importantly for assets for us accounted for 95% of our 2020 volumes and all those assets are in operation. So I'll kind of emphasize that all those assets are in operation NFC really significant milestone for us for really a number of reason number.
One because we've shown that we can deliver accretiveness number two is proof of concept for all the things that we're working on currently in the development pipeline and then most importantly, Kenny gives US a game plan that we can replicate in other markets to be able to deliver our product really faster cheaper and better so it's really been.
When exciting 90 to 120 days for us to run through those briefly first we have the Montego Bay terminal and so as you recall. The once you go very terminal initially was supporting 120 megawatt combined cycle. That's now been expanded to 150 megawatts. So that facility now supplies over 400000 gallons per day to indicate.
Your customers in our distribution business as well as power plants. The second asset that we'll be referring to is the old Harbor terminal, which supports a 190 megawatts of the combined cycle owned by mirror Bini and its partners as Wes mentioned that facility is running full out on natural gas. We underwrote. It originally is 360000 gallons a.
Hey, what we're seeing from an actual performance basis is something closer to 400000 gallons per day again outperforming our expectations on in facilities working beautifully.
On the third asset the Demarco heat and power plant with West referred to this is the first higher plant that Newport Coast Energy has design build and now operated and it turned on in commercial operation on Monday, and now produces a 150 megawatts of power and steam.
Today, I think I looked at it. This morning is producing almost 400000 down or I'm, sorry, it's producing almost.
380000 gallons today in combination with the boilers and also the the other facilities. It's doing we expect that to hit a run rate at the ended this month about 308000 gallons per day, which again is inline with what we had expected the fourth terminal, which is the San Juan facility is very exciting for us because it's the one in.
Puerto Rico is extremely fast track projects I think the end to end, we probably have delivered that an 11 months, which is a record for us. It supports 440 megawatts of combined cycle of existing power generation in Puerto Rico as Wes mentioned on Monday, we brought the coral energy in which is an FSRU to burst at the dock.
On the 24th on the on Monday, It worked beautifully no drama.
Lots of Great Pictures, we I think we posted on our website that your that you can see in a lot of really good media around that most importantly, I think for that facility is in commissioning now the second part about it is for the power plant itself. There are two turbans one has been converted so it was able to run on natural gas.
Now the second turban is in the process of being converted and that process will be completed by the end of this month and it's our expectation is by the end of March that that facility is up and running right around 882000 gallons per day. So again those four facilities.
Together or the lion's share what are committed volumes are in all of them are in operation in should be at run rate by the end of the month.
Ill flip to page 12.
So using that as the jumping off point.
Our next two facilities that are in progress are essentially replicas of what we have already done. So the low paused terminal is very similar to what we've done in San Juan as a matter of fact about 90% of it is exactly the same in terms of status in construction now our expectation is that will deliver first gas by the end of this year.
And the volumes there were expecting HP achieve or right around 450000 gallons per day as Wes also mentioned, we're very excited to talk about a new opportunity in Nicaragua, where we have signed a pp a long term PPA, where weve committed to its into Preconstruction phase now. So we're now gathering the resources to deliver on that project where they.
The expectation is that we were delivered in Q2 2021, and our expectation there is 745000 gallons per day.
I think importantly, I'm going to flip to page 13, and then talk about something that we're seeing in our markets, which I think you will be very interested in as was said a number of times the probably the biggest trend that we're observing is the world is just under electrified as you know the average to making per capita uses about one hence the electricity.
The average US person per capita and then the average Kenyan per capita use about 110th of what the average Jamaican uses per capita on power. So clearly from a worldwide perspective access to affordable reliable power power is just a cornerstone of economic development in every place. We go we're asked to solve this.
Problem the exciting part about it is based on what we have done previously entity experienced that we're getting in and what we observed to be the opportunity. The request thats coming in is for fast tracked power and whatnot. All nations governments private sector are focused on is the ability to have an integrated fuel infrastructure and power solution.
In 12 to 18 months, because that's the problem that they want to solve and so from an opportunity perspective, what we think is in any location, where you have about 200 300 megawatts of power that can capitalize a terminal, which is which is going to be fuel infrastructure and into power generation to support it and arpus.
Cuellar markets and given our given our experience in our track record our competitive advantages very competitive advantage is the terminal itself with the terminal you control the infrastructure in the fuel, which gives you a tremendous advantage to provide fast tracked power. So our goal in each of the markets that we operate in for the with the terminal.
Is to see opportunities, we can provide additional power generation in 12 to 18 months.
These opportunities we would expect to see in places like Mexico, Puerto Rico, and a number of other jurisdictions in which we operate in it gives us the key advantage to deliver that infrastructure quickly and it a power price that's going to be more competitive than we believe anyone else would be able to offer as west sitting combination. Our goal is to is to be able to.
Build own and operate 20 terminals to be able to tool to deliver somewhere between eight gigawatts in 2004, Gigawatts of installed power, which would make us one of the largest IP fees on planet Earth and as you also said, we're about a quarter or the way there. So we feel very good about our chances of getting to that goal I now flip to page 14.
I want to give you a couple of highlights around the operations for the quarter.
I think most importantly.
About this page in from the operational perspective is no news is good news and what I mean by that is our track record of zero safety incidents incident has maintained I think quarter after quarter and that's really important to us for the most important number on the page from our perspective is zero everyday you have to be extremely focused.
And religious about making this zero.
So from our perspective, the health safety and welfare of our people as well as the stakeholders in any environments, which we operate is paramount for US also a couple other numbers to highlight on the page our assets.
Our essentially extremely reliable and available, but most importantly, I think the take away from it we are more reliable and available than than the customers that we support and the good news about that is from the customer perspective, we're viewed as critical infrastructure and so day. After day, we continued to be available for them as they delivered.
The customers that are in critical on their side. The other thing I would highlight on this page is our number in terms of LNG truck and ship transfers goes up quarter over quarter without incident, which we're extremely proud of so today, we have about 5500 transfers without incident, which puts us number one on the list in terms of.
Experience in the western hemisphere, and arguably probably around the world from an operational perspective everyday we continue to try to get better. So we're introducing new technology, new processes with just a relentless drive to get better cheaper faster. So we can be more competitive in the markets in which we operate now I'll turn it to Chris we can talk about.
Financials, great. Thanks, Brandon and it's wonderful to talk to you. All this morning first on page 16, let me take a quick moment to walk you through the financial results for Q4 2019.
First and most importantly, as west is already highlighted this was the best quarter in our history Q4 was our first quarter positive operating margin and we're well underway at over 475 million on committed volumes alone.
As you all know and if these key driver profitability is consumption for Q4 2019, we averaged 538000 gallons for debt. This is an increase of over 200000 gallons from Q3, largely due to the old Harbor plant coming online in ramping over the course of the quarter.
During the month of April with old Harvard's and Melco, and Puerto Rico ramping we should be over 2 million gallons today of consumption.
As additional volumes are sold there is an exponential effect on margins, which we expect to be above 30% in a normalized basis as asset utilization increases and legacy expensive gas purchases are concerned.
Regarding SDMA, we had expenses for the quarter of about 30 million, which included 5 million of stock based compensation and about 3 million of nonrecurring development costs.
We do expect the go forward annualized SNA for the company will be around $80 million, excluding noncash compensation expense and non Capitalizable development expenses.
Moving to page 17, this outlined some of the key characteristics of our Apollo debt facility and shows the strength of our balance sheet, which fully funds all of our committed projects.
In January we closed on a three year 800 million dollar term loan facility. This financing accomplished many of the key objectives. We've discussed on these calls in the past.
We added 300 million of new capital to prosecute additional terminals, we extended our maturity out into 2023, we retained maximum business flexibility and we accomplished all this while maintaining materially the same cost of borrowing.
One of the most important features whoever's that this debt can be repaid at par at any time and as alluded to in the past once our assets come online. We can borrow additional amounts that will fund new development projects at lower cost of capital.
On the right side of the page as you look at the balance sheet, we show debt and cash as of the 12 31 19 measurement date, but we've also included a pro forma cash number of $404 million. This 404 million as result of the post year end funding of the remaining $52 million under the senior secured bonds.
And the additional capital provided from the Apollo facility that driving factor in executing the refinancing transaction was to ensure that we had ample cash on the balance sheet to fully fund Oliver committed projects, including the.
As you turn to page 18. This news will come as no surprise any of us with the LNG market has materially deteriorated over the last few quarters as west is that in the past LNG supply is added one train at the time, while demand is turned on one turbine at a time.
And if moore's produce than consumed this oversupply of LNG, coupled with the fact that the commodity can't be easily stored will result in the class surprise, but we've experienced in the last year.
Global LNG prices have seen a reduction of the spot market of over 70% and the term market down nearly 50% from the end of 2018.
For NFC once projects become operational and we see the consumption profile of the asset we will contract for supply. This is exactly what we've done in Jamaica, We've recently announced publicly that we executed a long term supply agreement for 2020 to 2030 for a portion of our volumes priced at approximately four.
Or 50, using today's Henry hub.
On page 19, we show the depressed LNG, which we talked about the fact of these depressed LNG prices have created an amazing opportunity for NFI to take advantage of this market imbalance. In fact, we were able to buy our first commissioning cargoes for Puerto Rico below $2.40, which we.
We will be delivered later this month.
Our corporate models of assumed in LNG cost of $5.50. However, our ability to buy in supply at today's prices demonstrates the material hidden value of our position as.
As you can see on the graph on page 19, we've only purchased about a third of the supply that we need over the next five to 15 years.
You bought LNG for the remaining life of NFS committed volumes and you assume today's spot prices of roughly 250 for Caribbean deliveries the incremental earnings would be approximately $3.5 billion compared to our projections operating margins over the next five years could be up over 35%.
By taking advantage of current market conditions.
Turning to page 20, this slide should look familiar to you all as it shows the rapid ramp up in committed volumes. We've included this slide in previous presentations and while you should not mistake. This for formal guidance. We do included to demonstrate that these assets of material cash flow capability once operational as Wes mentioned.
Under operating margin frontier in Jamaica assets alone will ramp to $275 million on an annualized basis. During Q2 of this year and when you include Mexico in Nicaragua, we expect to be over $475 million next summer.
You look at converting just 50% of the volumes that are currently in discussion operating margin expectation exceeds $1 billion.
With that I'll turn it back over to us great just too.
To wrap up before we open the lines for questions, Let's page number 22 in this talk about zero.
We're introducing zero zeros, a new division for a fortress zero carbon zero emissions all good.
I nations goal of ours to be a zero emissions company 10 years from now a dangerous, but our plan and humanity can't afford for us not to be ambitions about this.
Our path to getting there is green hydrogen like green hydrogen hydrogen is the most abundant element in the planet, 90% of all the elements in the universe is hydrogen so it's a very abundant element it doesn't exist nationally by itself, but existing lots of forms that can be converted from their current form into hydrogen.
With the application of a little bit of energy.
The.
The path to getting there and I'll talk about this and just a second is to use renewable energy I will tell you I think that that makes more sense. The cost reduction are falling rapidly and makes this a more and more achievable goal. So look at page number 23.
The the schematic on the top of it is a good picture of how you how electrolyzer actually works. This is a very very simple thing imagination.
A fish tank, where you had to electrodes. It came in on this positive one of those negative rent electricity through it breaks a molecule into pieces the bubbles on one side and the.
I end up being hydrogen the other side they end up being oxygen. This is the processes developed over 100 years ago. Its use daily in the space station its use daily and nuclear submarine. So it's not a is not a space age technology at this point at all what has changed is that the cost and has changed dramatically. The reason that hasn't been used historically as a replacement to fall.
So fuel is very simple the cost of electricity going in with something greater than the value of the hydrogen going out what's changed is changed dramatically as the cost of renewable energy and so I think the narrative around renewable energy in my opinion has been a little bit misplaced and that we view it as a replacement for base load power and wall. That's great. It's now.
On a dispatchable power so the Sun doesn't China, the when doesn't blow it makes the energy and not not really viable where they can do though as you can take that same power when it does exist and converted into hydrogen.
And very simple terms the of the goal is to produce one dollar hydrogen unless a $1 per kilogram hydrogen to convert that to compare it to natural gas multiply times seven a hassle onetime seven and a half $7.50 would basically be half roughly of the cost of diesel about the same as a natural gas that'd be the end of fossil fuels.
It's an ambitious goal to get there obviously today, we think that the costs on anywhere from two to three to $4 per year, but a bit away from it but governance government subsidization of it carbon taxes and of course, the development of technology could change this narrative.
Average run graphic.
Last page page 24, so we don't want to be the mad scientists to find the cheapest way to create the hydrogen we want everyone. That's on the line here and other people to go in find different ways to do it. Our goal is to commercialize that hydrogen wants is actually created so.
The last mile to using our gas infrastructure is where we want to really provided.
Most of the infrastructure that we are creating is entirely usable hydrogen.
GE turbans can use 95% hydrogen today, there's the gas is the molecule is not that different from the CHF four in the methane in terms of handling and whatnot. So what we're doing is very much helpful. In terms of providing that last mile.
Our goal and this is too is to to be the catalyst to help people get from here to there.
I believe and big tense I believe in people wanting to be included in this whole process is a huge challenge for all of us, but it's also huge opportunity.
We learned by doing and so in this case, let's do what you can do with US as partner with US. If you have proposals and you have the project that you want us to take a look at send it into us Jake since he is our director of a zero will be the person the point person for thus we have put together a library of all the other hydrogen articles that are out there in the world and so you can take.
Look at our library and go through this now that I've mentioned hydrogen condemn you do now reading a hydrogen article each and every day, there's a lot of different articles that are out there in the world about this there's many different thoughts about people in how they do it electrolysis being the most most obvious way, but there is concentrated solar power. There is burning underground oilfields, there's lots of different ways.
People have thoughts on country and hydrogen and once they do we want to catalyze and our goal is to do in a very simple terms. The next 12 months, we want to have one or more pilot projects would you actually take you down to and show you actually how it works and so you can see and first handheld without actually operates on the do are by nature.
And when we talk about the the existential threat that we have.
Ladies and gentlemen, please stand by your NFI fourth quarter and full year earnings conference call begin momentarily.
Thanks for your patience and please standby.