Q2 2020 New Fortress Energy LLC Earnings Call
Ladies and gentlemen, please stand by your New Fortress Energy Conference call will begin momentarily once again, ladies and gentlemen, thank you for your patience and please standby.
[music].
Yes. Good question. During this session you'll need to press star zero or start one on your telephone. Please be advised today's conference is being recorded if we were quite any further assistance. Please press star zero I wouldn't like down the conference over to your speaker today Mr., Alan Andreani head of Investor Relations. Sir. Please go ahead.
Thank you Michelle.
I'd like to welcome all of you to Newport Your synergy LLC second quarter 2020 earnings call.
Turning to hear today are with Cedents or CEO and chairman of the Board, Chris Jones, Our Chief Financial Officer.
And then you've got people marine or Chief Development Officer.
Sam of dollar who leads our Mexico in Nicaragua projects, and Jakes Mesquite leads zero or Green hydrogen division.
Throughout the call we're going to reference the earnings supplement it was close to the new fortress energy website.
No it already done so I'd suggest.
You download it no.
There should we will be discussing some non-GAAP financial measures during the call today, the reconciliations of those measures to the most directly comparable GAAP.
Major can be found in the earnings supplement before I turn the call Liberty 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 are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release.
Any investor presentation regarding non-GAAP financial measures in 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.
Great. Thanks, and thanks, everyone for dialing in early on a Monday.
As Alan said, we're going to a slip through the supplement that we put online that hopefully you all have in front of you and try to do so you know in a pretty straightforward man and then of course open up for questions at the end. So let's start on page number four so highlights for the quarter a.
There were many you last four and a half month since a the covered a you know situation develops has been challenging ways that we never expected, but also rewarding ways that we couldn't possibly a hope for.
This is a transitional quarter for us as we went from a company in development to an operating business highlighted by the the project in San Juan which.
It was completed actually during the quarter commissioned and then on July 10th It actually has had a full run rate volumes on the two terms that are down there a record volume sold in July.
Operating results for the company speak for themselves. So we had a or 1.7 to 2 million gallons for the remainder of the day I'll go through the detailed out in a second pipeline for our business and future customers is a is more robustly never house ban.
We undertook a number of corporate actions for the quarter. There are meant to simplify and create the company that we endeavor to become I think we're actually very positive responded to and I'll go through those one by one and lastly, our the new logistics solution that we have greatly expands or growth prospects and reduces the time for us to convert a prospect into an operating assets, let's flip to page number.
This a this page violates my my presentation are also being overly dance and hard to see what we try to create a couple of circles to try and highlight what the differences are this is simply a chart that I get a everyday which shows the volumes across the other portfolio you can see that on July 10th is when we had a significant step up in our overall volumes.
As we hit a run rate in Puerto Rico, the margin on the right hand side is what yeah. There does that relates to those volumes. The next circle, you'll see really light relates to jump into August town, where we'll get a one more incremental project, which comes online or should that your Michael boilers. That's also the burning off of the last of the kinda.
An expensive gasoline, we haven't the company, it's or operating margin steps up considerably can you just follow that far right hand column on down you'll see margins, then going from $375 million to $446 million no throughout the course than rest of the year. When I look at this chart, a course or what it speaks volumes to be about is that there are a handful of asset.
It would make up the bulk of our operating profits as a company. Obviously our goal long term is for this page to have many more columns of called out significant assets would exist as we diversified the portfolio both by Geographics as well as by the nature of the assets as we get more and more operating history. The company's value is only going to increasing substantially.
The net of it as we look at this page were averaging 1.79 gallons per day now that's going to increased about 1.99 as we close at the end of the year. Before then we get the two projects that are in development right now in Nicaragua and in Mexico to come online then of course, there's a long long list of projects behind that.
So page six five major corporate actions since last quarter and I'll go through each each of them one by one over the next couple of pages all of them weren't effort for us to now take these steps going from being a development company to an operating company create the most simplistic and transparent investor friendly shareholder friendly a.
Company that we can I'm very happy with how each of them has has worked out this fall.
Up to page number seven.
First one was an easy one which is basically a myself as well as Randy or don't converting all of our class B shares of class a shares we had held our shares basically as an LLC.
Prior to doing so this simply creates one class of shares all investors have exactly the same rights across the company greatly increases the number of of Oh shares that are available for 770 million shares and total some shareholders recap due to internal restrictions on percentage of free float doing so this increase the free.
The free float prospects dramatically top holders increase our positions by 10% since conversion average trading volumes increased by 150000 shares a day now obviously, we still hold a disproportion number of shares internally and we haven't issued any shares since the IPO as we issue equity overtime and inevitably we will that'll increase.
Free float and only add to the the trading volumes that we have number two and this is a very simple thing, which we did last week, which basically was to convert the company from an LLC to a C Corporation over 99% of all the companies are included in the indexes RC corporations. This is a simple thing to do.
Index and passive funds represent over eight and have trillion dollars and assets. We expect inclusion in a number of these indexes over the next couple of quarters again, something that would expands our investor base it should increase shareholder value.
Page number eight.
The the LNG contracts, we had contracted with a counterparty to buy a number of cargoes to remainder of the year eight of them. What we did at the ended the quarter was negotiated.
Transaction, whereby we simply canceled our obligation to buy those contracts now those weren't done at higher prices in the before the market had come down we paid a premium of $105 million half of it now half of that at the end of September and what that does basically has allowed us to then go replace those cargoes and buy them at on a spot.
Basis, and we think that that is a beneficial transaction for a couple of reasons one is.
The strike of the transaction that we consummated was $2.94. So in simple terms to the extent that we're able to buy cargos in cheaper than $2.94. It's a positive economic benefit for us.
We have subsequently bought in two of the eight cargoes that we are shorts were six more to go. The first two were bought into the dollar 90 to $1.85. So we were able to meet the goal of bond in a little bit a cheaper, but more importantly, what it does is basically you then replace six dollar and 77 gas roughly with two dollar gas and so you're operating margins on it.
Current basis go up substantially reflects the true operating potential the company, it's actually the right way to presented so in very simple terms. If we did nothing other than paid $105 million to two to cancel the contracts and replacement exactly that level. It's still would have been a very very beneficial transaction. The net of it as we expected to be positive to us.
So to the tune of $15 million to $25 million. So we do make it a little bit of money as a result build up but it also does it really present operating.
Profile for us that is terrific now what we did subsequent to that as we went to the rating agencies and we asked for a rating on our existing facility. As a result, we got ratings on Thursday, and Friday from S&P in from Moodys basically single B, plus so be a one single b plus on both of them.
In both cases.
We believe that our rating as a company should be better than that but this is very much of a process I've been through this many times and.
The the comment that we got as our operating history with some of these assets is quite now which in fact, it's true that will be less true three months six months 12 months from now and so if the operating metrics hold the same or improve both of which we believe are likely and our operating history is consistent we think that this is beginning of a long term upgrades for the company. Our goal is to begin the process to be in it.
Some great ready company, what that translates into obviously is just lower interest rates and terms the debt facilities that we have our overall debt is about $1 billion overall cost of debt is about eight 8.3%, 8.4% in total we believe that theres a material amount of.
Savings to be had simply by refinancing, whereas what is today and obviously, we route to get to investment grade rating. Eventually we can save a very very material.
[noise]. So page number nine can be the last action that is still work in progress is to consider a dividend dr. aboard about it when you think of the growth prospects. The company has it may seem odd to talk about a dividend when you need capital to grow your business, but we believe the profile of our company a year from now two years from now.
As one that will generate significantly more capital than it has opportunities to invest.
Not because theres not a lot of great opportunities in the world, but because our cash flow. So is so high and so productive based on the opportunities that we have.
I believe that considering a dividend on a modest amount our cash flow, perhaps 20% to 25% of cash flow. So we still would retain a very significant amount of the of the cash that we generate would be the right thing to do as we look at our financing and a refinancing prospects for the company. This is something that will become.
Material prospect for us.
20% to 25% of.
Free cash flow over the next 12 months would translate today into about 40 cents a share so call. It 10 cents a share per quarter, just as a representative of what the dimensions would be if we did pursue something like this so more to come on this the path would be go sort out the financing options for us number one with our ratings that enhance and the number two will.
Addressed so [noise].
[noise] lastly, before I turn this over to achieve the brand and others. All these actions plus the the operating performance completes our transition from a startups and operating company. The chart on the left hand side shows the steep ramp up the we're actually going through right now in terms of operational cash flows on the.
Right hand side of translates into EBITDA numbers of $359 million in EBITDA growing to 479 I believe the growth prospects. This are much much higher than I'll go through the.
Some of the pipeline stuff that we've got going on but there's a good illustration of kind of what we've accomplished thus far so very good core.
Fair enough.
Thank you with good morning. Thank you all for joining US we're excited to update you on we've accomplished since we last spoke moving to page 12 committed volumes at run rate run rate Prosser operational facilities. We're proud to report that are committed volumes are at run rate across our operational facilities as west noted with our San Juan facility ramping up in Puerto Rico, we have come.
Tweeted her transition from a start up to an operating company each of our four major operating assets of now hit the run rate volumes totaling in excess of 1.7 million gallons per day. In fact, we expect Digimarc will brothers, we begin taking gas in next 24 hours, adding as much as 150000 gallons a day to our total importantly, each of these facilities had built.
In capacity to serve additional customers as an example, we started loading LNG tankers in Puerto Rico last week to serve on on island industrials looking for behind the fence power generation solutions, we expect demand for that service to grow significantly over the coming month.
We're constantly looking for ways to optimize our assets and expand service by increasing volumes to existing customers and adding new ones. We've shown our customers that we can deliver critical infrastructure and the most critical period further adding to our reputation as a go to infrastructure provider moving to page 13 operational asset performance.
Health and safety and welfare of our people as a top priority as is being a good steward of the environment in the countries in which we operate our operational teams continue to deliver terrific results I will focus you went on zero on the page because that's one that we look at every day is probably the most important number you've had zero days away from work zero Recordables in zero still something our operation.
Our team is extremely proud of and we as a company prioritize every single day, our availability and reliability numbers continue to exceed that of our customers. So in short our assets are performing at or better than expected, 99% year to date average availability and reliability, which is critical to customers that we serve we've executed.
On over 6600, LNG truck and rail tender loads to date in over 650, Sps transfers all without incident, a testament to our team we continued to be the clubhouse leader by conducting the most shipped ship and shipped a short transfers of any company in the Western Hemisphere operational excellence is a must have.
Summers in a competitive advantage to win new business now I'll turn it back over to the team talking about new innovations in the way we deliver projects great. Thanks and have the same Abdullah walk through our development.
Projects and just a second here, but flip to page 15, let's spend just a couple of minutes on the cartoons and the next couple of pages.
Basically the cartoons represents our history as an operating company and Howard and reflects how our business operates today. So LNG is shipped around the world in very large cargo ships in the large ships are really large ships 300 meters long 70, 80 meters high 60 meters wide. These are huge huge ships very.
Efficient way to ship LNG around the world, but not really the ships that can be accommodated most of the harbors, there's simply too big to do so so the first innovation that we had as a company seems like a very simplistic one and indeed it was was simply to take those big ships fill up smaller ships theres still quite large and then bring those ships and to support to offload there.
Angie and service our or customers.
The types of port So we can bring in.
Bring these assets into went up exponentially, which is terrific Ami brand. Instead, we have actually managed to do hundreds and hundreds of ship to ship transfers without incident. So it's obviously, a very safe way of doing so the challenges that even once you have filled up a smaller ships you still then need to have do you need to develop marine infrastructure in order to then bring it onshore.
When you hear the words marine infrastructure, where you really should hear is 24 to 36 months like it to be faster than that but the reality is anything anytime you do something on the water, it's going to be an extended period of development and so what we are very focused on is half we cut down the time in the cost of doing so any flip to page 16, we have actually.
One step ahead. So we think is going to be making meaningful difference to us in terms of the other projects. We are so we looked at that at this and you talked about doing that a couple of years ago really in the context of our current projects that off Sam talk about it was it was really his idea the teams idea to actually look at this again and we have subsequently have done the work on it and we believe.
This is a very very good solution and what we've done basically is just simply cut out a shift. So you take the big shifts views. For example, 160000 cubic meters of of cargo divide that by four for gallons that would be 40 million gallons of a gas ownership and what you're really doing is moving 40 million gallons of.
Yes into 10000 gallon containers. So it's simply takes a very very efficient manifold that allows you to take the gas from the very big ship and put a directly into the ISO containers themselves there's over half a million ISO containers exist in the world today, It's a very very prevalent form a transportation to move this around by both truck.
And by by rail and so what we're doing this in this cartoon is taking the big ship filling up a number of ISO containers on a smaller vessel you know us via barge et cetera, then you bring that vessel into port virtually every part in the world can simply take cargos offer ships and so what we've done is we have cut the cost of capital.
Because we've got one ship out of it by by half or more we've cut the operating costs out again by taking the ship out of it by more than halfway done by taking a ship out of it and then lastly, and most importantly, as we cut the time down from 24 months to three to six months and we've greatly expanded the number of places the world you can do it. So this is a big innovation for.
Yes, it's something we're going to deploy at our first two assets that those first two projects that we are developing right now with it and it was that I'll turn it over to suit Sam.
Thank you Ed and good morning, everyone. It's really important to standardize the delivery method of our project. So we can drive the cost and schedule down as West said, it's great also we will have those two project, Mexico and Nicaragua as the proof of concept to turn on.
Here.
So a little bit of update on each of the project. So for Mexico. We did they become entry surveys few weeks ago unconfirmed dredging it's complete.
This allowed us to start the bulk hedrick painter and terminal construction. That's coke was awarded last week and will be completed by December 15th.
According to this schedule, we will ship that power generation units beginning of October. We are currently finalizing the negotiations on contract with the vendors who have the equipment available.
Moving to any color I bought projects, we have filed for all the critical permit.
And expect to be fully permitted by end of September this year.
We also completed the concept design and planning to award the construction package by end of August and target completion date end of this year.
Thank you.
Thanks Sam.
Turning to the new business section on page 20.
We have a very very robust pipeline.
Over 10 projects that are in serious negotiations focus areas for us in particular, our central and South America, but we do expect our first projects to go F. I'd in Asia. Later this year. The goal in simple terms is to get to F.I.D. at least two of these projects in our pipeline of between now and the end of year, there's a potential to get to as much.
He is eight we thank.
If you flip to page number 21, what that would mean in terms of the math to the business is actually very substantial.
Each project is different we tried to generalize it because of course, it's easier just to talk in terms of simple simple numbers on for illustration purposes. We said assumed the following 300 megawatts of power total project cost between 250 and $309 operating margin between 100 $200 million. So.
Simple terms for transactions.
Would generate $600 million of margin for us we should roughly double the amount of margin. We haven't our company eight deals would be $1.2 billion in margin and we roughly tripled the size of our company in this phase of the so.
Not a lot of detail that I want to go to go into in terms of the different projects themselves as your competitive situations and obviously, there's there's a lot going on around the world I think it is extraordinary though that in these co. The times the amount of communication, we're able to have with people remotely. So obviously in the new business side. This is something that a hands on.
Interaction is very helpful. We've been very curtailed in doing so and yet we've made significant advances across the the the pipeline and I feel like the second half of this year is going to be quite a productive one for us so.
Next section is just let's talk about gas.
Gas prices are both the biggest threat and the biggest opportunity for our business. The chart that I put in front of view is one that we did for a customer here a few months ago and it's simply shows that if you look at delivered gas versus delivered diesel over the past 10 years over 99% of the time gas has been cheaper. This shows you the.
The tremendous value of the products that within the proposition that were offered to people. So over 99%. So all the 24 days in the last 10 years delivered gas is cheaper gas markets overall are still very oversupplied.
You asked gas inventories, 15% higher than the five year average LNG prices have come down 85% over the last couple of years. So the gas situation is a good one to be short, which is effectively where we are right now, but there is theres other activity, which we think is going to be a mitigant to that at some point gas rig activity has declined precipitously.
With drilling going down gas supply will go down if you simply do the math and forecast out six months 12 months 18 months from now it is quite possible that this reduction in.
Gas and oil drilling activity will lead to a stabilization and rebound is very important for us as a company to capitalize on depressed prices in the near term. It is the my number one priority as as during the company something I'm very very focused on.
But in terms of the next page page 24. This year, we need eight cargoes to satisfy our customer demand we bought into so were a net opened on six.
Next year, we need a total of 33 cargos between.
Jamaica, and Puerto Rico, and Mexico in Nicaragua, We have purchased 12. So were opened on 21 or 64% of that 2022 going forward.
We need a total of 36 cargos.
We have purchased a total of nine and so we're still open on substantial amount of that as well. So it's a big opportunity for us to close the gap, but obviously if.
The pipeline translates into new projects and the gas demand grows there is a substantially greater amount that we need to do I've got some real views about this that we're working on not really ready to share with folks now, but I think in the next quarter or so you'll see a significant amount of activity from us on this front, we're not planning to be in the upstream business had been.
Asked that question many times, but specifically I have no desire or interest or really experienced in drilling. So we're not going be the upstream business, but we do think that there's some subset subs a substantial opportunities and we will focus on this.
Okay.
Good morning, we're excited to update you on on our efforts to reach Sarah missions as a company and zero Zero Division that we formed.
As Wes has said repeatedly our central focus as a team it's really define dollar per kilogram hydrogen at that dollar per kilogram level, you're about the equivalent of $7.50 and then b to use which is.
About half the cost of diesel on around the cost of delivered LNG into our markets around the world. So that's where we think we'll see hydrogen become a zero emissions alternative to a lot of just slip fossil fuels today and really transform a modest energy markets, because we can utilize our existing gas and LNG infrastructure in large part.
With hydrogen we believe that this presents a really great opportunity to de carbonize or existing customer base and it also creates a tremendous amount of opportunities to grow our customer base across our markets [noise].
Since West announced a couple earnings to go are the formation of this division and our mission. We've actually received over 90 proposals a lot of interesting technologies and projects that we've gone through due diligence on over the last several months, we've narrowed those proposals down to kind of a short list of what we think are viable proof of concept projects.
A number of what we think are really interesting emerging technologies that could advance our efforts to lower the cost of making green hydrogen to one dollar per kilogram [noise].
Just one example, the kind of share with you guys Theres a promising you know Israeli electrolysis technology that we've taken a look on a company that we're talking to we believe that the technology can significantly lower cost by improving efficiency and minimizing the power loss that you experienced when you convert water hctwo.
To hydrogen and oxygen. It also holds promise to really lower capex. So we think paired with a low cost renewables. This type of technology can significantly advance the efforts to reducing the cost of green hydrogen not only are we looking electrolysis technologies, but we do think that the that there are some alternative.
Ladies that aren't as reliant on electricity costs that we think can really accelerate the path to dollar per kilogram hydrogen. So we're engaged with the number of companies in that effort.
Our goal isn't really to create the science, but it's to partner with these companies partner with these technologies learn how to use them and commercialize it around the world for our customer base and planet.
Our goal is to get to F.I.D. by the end of this year on our first proof of concept project, we don't anticipate that being a huge capital investment, but it will put us on a path to getting to dollar per kilogram hydrogen and really help us build experience build expertise in the space and quickly advance towards our goal of becoming in zero emissions company.
Thanks, Jay it's wonderful to get to talk to you guys. All this morning, if you turn to slide number 28, I'll quickly walk you through the financial results for Q2 2020.
Starting with the production numbers you can see that during Q2, we averaged just under 1 million gallons per day. The increase in volumes is driven by the gym Alco CHP plant operating for the full quarter and over 200000 gallons per day on average and Puerto Rico. There was a little drop in volume sold an old Harbor versus Q1, which is result of maintenance procedures.
Being undertaken by our customer.
Revenue for the quarter was $95 million, just shy of a 30% increase quarter over quarter, our cost of sales and own them with slightly higher due to increased volumes over some of the costs associated with commissioning at the San Juan facility was capitalize on to the balance sheet.
Importantly, we have included here the line for contract termination charges and mitigation sales, which was a $124 million for the quarter.
This is comprised of $105 million charged to terminate the eight 2020 cargos, along with an $18 million mitigation sale charge for one cargo to match anticipated consumption as Wes mentioned, we are paying the termination charge in two installments. During Q3. So you don't see any impact on cash at the end of Q2.
Further the timing of the cash outflows as similar to when the original cargo payments would have occurred.
Also consistent with Q1 or cash SGN, a expense was right at the forecasted $20 million per quarter, excluding stock based compensation non capitalizable development costs and costs associated with simplifying our corporate structure.
Lastly, important to note that we maintain ample liquidity to fund the build out of all committed volumes, including Mexico in Nicaragua, using a combination of cash on hand, less cash flows from operations.
Fuel flip to slide 29, you'll be familiar with this page, but thanks to this the decision to terminate the remaining 2020 cargos the timeline to run rate cash flows has been accelerated we're operating at about 1.7 million gallons per day today and will grow to around 1.9 million gallons today for the remainder of the year. We have a couple of additional assets that will fully ramped.
During the rest of Q3, including the boilers at some small scale customers in Bahamas, Jamaica in Puerto Rico.
Given the volumes running through the three on mine terminal terminals today, the business will be at run rate operating margin exceeding $400 million during the third quarter and grossed over 550 million once our new terminals come online in Mexico and in Nicaragua. It is very exciting to note that if we continue to execute on contracting new committed volumes, we can clearly.
See NFI, earning well in excess of 1 billion of annual operating margin.
If you turn to page 30, you'll see that we're progressing on our capital plan, including lowering the cost of debt and returning capital to shareholders step one as Wes mentioned, we met with rating agencies and received a beep us be one rating.
Step too we will soon launch a refinancing, which we expect will cut around $25 million of cash interest expense.
Step three after completing the refinancing our goal is to implement a dividend that we expect to size around 25% of free cash flow.
Our capitalization strategy for the business remains as you've heard us talk about before modest leverage targeting targeting three times are less ample cash on hand to nimbly fund growth and strategic flexibility to build new terminals by ships and its ancillary equipment.
I'll turn it back over to west.
For questions.
Operator, operator, we're ready for questions.
Hi, Dan Ladies and gentlemen, I could have a question at this time. Please press Star then one on your touched him tell us.
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Our first question comes from the line of along.
With Scotiabank. Your line is open. Please go ahead.
Hey, good morning, guys, they're all doing well.
First question on your new business pipeline, you highlighted to potentially if I need but ended the year and also pointed to your first potential projects in Asia.
If you could share more about the progress on those discussions and anything specific you can share between the regions or countries, you're targeting that makes you confident about advancing those here in the near term.
Great. Thanks for the question, we have we signed three I'm only use in our pipeline.
[music].
In different regions.
For competitive reasons I would prefer not to be specific about the country specific way as we said before there are 10 areas. The 10 sections of the country or the world that we think our overall interest we're very focused on geographies that are large and growing populations have growing economies.
Have a substantial amount of thermal power that is installed right now that is burning.
Diesel or other fuel oils.
And also needs incremental power that actually is not a very refined search and that actually produces a lot of different outcomes. One other things that we're very focused on as a business is now to greatly expand our sales efforts and do so geographically. So we've hired one senior sales person.
In the last couple of weeks we have.
Goal to add another four to six people in that area plus then all the relevant staff between now and the end of the year and really focus on building out our sales effort our businesses as all about customers essentially its customers and its fulfillment of those customers needs is kind of way the whole business operates so the more customers, we can be in front of and the more.
Solutions that we can provide to their their challenges the better or more robust our businesses aren't but.
But I'm, sorry, but I don't want to be specific about the exact project for the the countries that we've done I feel.
Okay, then we're going to have substantial not to report to you between now and the ended the year my goals et cetera would be to convert at least a couple of those and I think it could be materially more than that.
Got it there.
And then.
We outlined target the 50 million in cost saving.
How far along are you in that process and what have you identified thus far.
More specifically on DNA shipping savings I think and your savings are obviously tied to that the refinancing process.
We are very far along on the finance side, Chris did a good job I think and laying out kind of what were what our goals are so looking at debt. We think we can save 20 $25 million readily just based on where.
Debt for a single B plus company in the infrastructure space should trade at relative to what our current financing rates are so on that side, we feel very good about that on the operating side, we have done a substantial amount of work on our new logistics technology and we feel very good about that we've actually placed orders for a couple of hundred of.
The ISO containers already we think that we will be one of the bigger ISO container operators in the world. So thats a big big focus for US obviously, we have a lot of great Counterparties that we have bought from in the past. Some people that we were talking to now the ship portfolio what happens when you cut the small ship out of the middle as you go from a position of a fairly constrained market.
To one that is very oversupplied. So in simple terms, there's about 500 large ships in the world. There's many many fewer small ship. So that's a real constraint to the business. If you then cut that out and go to barges and offshore service vessels or less fees et cetera, you go to thousands actually tens of thousands of out of assets that are available.
So the cost profile that goes down dramatically the availability of it goes up limit and then it just becomes a simple logistics and operational challenge of then moving the assets one versus the other so we feel really really good about it.
Yeah.
For me Thanks, guys. Thank you Daniel.
Thank you and our next question comes from the line of Devin Ryan with GMP Securities. Your line is open. Please go ahead.
Great Good morning, everyone.
First question here, just want to talk a little bit more about the hydrogen opportunity, which is quite interesting to us and I, just you're trying to pick a little bit more about the commercial opportunity for NFC and really if you can just a little more detail around how you would actually booked to monetize.
Opportunity appreciate you're looking at a number of potential applications here, but.
Anything more around kind of at the monetization and just what that could look like from a timing around implementation.
Yeah, so I'm going to take the so.
A couple of quarters ago, we are very interested to hear from people to think that they've got a good solution to produce said.
75% of all the elements of the universe, our hydrogen 24% helium, 1%. Other so the world is full of hydrogen the challenges that it is tied up in a molecule with something else. So really the simple goal is how do we actually extract the hydrogen from whatever its hooked up with in a way this cost efficiency. We can then.
User that's debt that is the mission of the entire zero kind of focus for us so.
Electrolysis, which has been around for a 100 years.
Is a tried and true method there had been improvements to it as Jack said, we've met with a number of companies in this sector. There is one in particular is promising that's all great.
It is not cheap enough in terms of meeting the goal of the dollar and and I think that in the foreseeable future is not likely to meet at that level. The good news is there are many non traditional forms of extraction that we think are really interesting and when jakes as we're looking to to create a pilot program essentially what I would I'd like to see US do as a company is.
Find something we think is interesting.
Build a hands on proof of concept pilot program to see what the actual cost of extraction results and see how close we get to the dollar once we have hydrogen.
Benefits from our standpoint is that the vast majority of our gas infrastructure can burn hydrogen today. So we had hydrogen we can injected in part into our into our pipelines injected into our turbans. It can burn it today.
The difference between hydrogen and methane CH for is obviously cost and right. So thats the cost we're very focused on but most importantly, if you really burn hydrogen there is no emissions. So in simple terms, if we really could create dollar hydrogen in really significant quantities. What we would have is a source of sustained.
Double product that creates no admissions and that that is the goal and so we are relentless about trying to find different options for that and we've looked at a bunch of different technologies, but I think that the the path and what we want to see is get proof of concept.
We agree on build the tested see those tests as viability on long term basis and go from there.
Okay very interesting thanks, Wes and then just a follow up here.
Once you pricing your good to see how nimble you guys are able to be just taking advantage of supply and.
Dynamics for LNG and given that you have pretty good line of sight into kind of the inner medium term needs in cost.
Just given the low pricing today, how far out or are you willing to kind of push duration as you ramp operations and.
It really just kind of the ability to take price off the table or the price fluctuations off the table as you.
And look to take advantage of some of that the currently favorable conditions.
I have much more report on this next quarter volatility I mean, I think we are very very focused on creating long duration supply at very low prices and.
Theres a number of different initiatives that were in the process with in the short term I think our positions a very good one right prices are depressed we can actually by end of the open market. When you can buy LNG delivered at $2 or less than long term supply is really not much of an issue to easily be concerned about but all you have to do is look at our future and how.
Gas, we're going to need to fill the needs we have for existing customers plus all the incremental business. We have you realize why such a hot topic for us so.
I've got a very specific point of view on what we should be doing around this and I think.
We'll have a lot to talk about with that hopefully next quarter, but it's something I am very focused as I said I think it's our greatest opportunity in the short term for sure right.
Andy as our greatest threat to our business is a long run for us and our customers and so to the extent that we can create long term sustainable supply at very low prices. It's a massive competitive advantage for us it's a massive risk.
Mitigate mitigant in terms of what the businesses. So it deserves to be at the top of list and that's where it sits right now in terms of my priorities.
Okay, Great I will leave it there appreciate the color.
Thanks.
Thank you and our next question.
Ryan with Citi. Your line is open. Please go ahead.
Hi, good morning.
So in to me the prepared comments you had highlighted.
Potential or current thoughts around 40 cents dividend.
Do you have any preliminary comments around growth rates or how you're thinking about structuring that policy over the long term.
Yes, they actually what we laid out in the presentation is how I think about it I think that.
A.
A projected dividend that is 20% to 25% of cash flow for this is for the foreseeable future is a good way to start uses a modest amount of our cash flow right now air returns capital to investors. It creates great transparency between the money that we make and the returns the company, but it greatly expands the industrial universe.
Lot of people are our that our investors will invest in companies that pay a modest dividends. So there's there's many obvious benefits of doing so we're going to work left to do in terms of the financing the company to accommodate that but I think we will be successful around that and I think that then as the company grows as our cash flows grow returns grow we can then past.
Those.
That growth back to shareholders at least in part is the reason why I think it's a sensible policy, but obviously it sits with the board at the end of the day, we can make our recommendations we have a very robust and very positive conversation about in our last board meeting and now we'll just see how it all works out of the financing side and kind of go from there.
And then there is also a comment around on looking further upstream.
In terms of your potential investment opportunities would this be more of a step out acquisition or investment.
Realizing you're you're probably not going to go to MP, but does that incorporate more traditional midstream assets as potential investment opportunities.
The company strategically.
It's definitely not upstream to the extent that we're not going to be buying gas leases anytime soon and I think that.
My focus is defined long term sustainable forms of supply and I don't want to avoid the question, but I also don't want to be really specific about it I think it's a it's an obvious opportunity for us and something that I'm very focused on and the minute that we have something which is.
You know really concrete on I'll be happy to share with here. So.
Okay, Great and that's all for me.
Thank you and your next question comes from the line.
<unk>.
Your line is open. Please go ahead.
Hi, good morning, guys on.
Talking about long term supply lets say today you knew for back to you are able to secure at least two projects per year for the rest of the decade, how far out would you be able to contract out LNG supply you decided to do as much as possible to fill those contracts.
15 to 20 years readily.
So the answer is along a little ads.
No I wouldn't flow.
So when you talked about you know.
Gas prices being the biggest opportunity and it gets thread I mean at this point. It's just the fact that these projects are in the bag, but once you get each year as you seek your then.
The plan to can do contract out.
LNG supply for the duration.
For the duration of the project given that.
You had them in the bag or is that.
Because that you are doing it I head of time, even though you're confident that you have those projects.
Coming up.
Our general philosophy around the gas has to be contracted long term once the assets are operating havent operating history, and thus a future that we can we feel good about predicting.
Of about 80% of our volumes that gives us flexibility that if an asset goes down for one reason or another theres maintenance or what that we've got some.
Some.
Wiggle room between what we have contracted and what we're actually providing so.
With that we would then look to set our goals on how much gas, we're actually going to lock in.
I do think also that there there is the possibility for a significant disruption in the business on the hydrogen side Thats. So there's a big part of it so that will go into our thinking about it a little bit as well, but I think.
Obviously between being quite short right now to a 100% contracted theres a lot of room in between there to to establish the right balance but.
Once again this is something thats, a huge opportunity a big challenge and I think is something Scott got off the gets a lot of focus around here.
Thank you and as far as using ISO containers on board or what's the on will we see a project next year, where you will secure the project and then.
You have that producing within six months.
Yeah, we the answer and chart is yes, we've got both of the projects and Sam talked about in.
In.
Mexico and in Nicaragua are essentially going to be serviced by this so think of the logistics being a large ship anchored close by but offshore.
Barge or and LSV that goes out with a bunch of containers on it with the manifolds that actually can then be Phil can fill them and then that vessel comes into shore. It's off loaded by a crane. He put the empties back onto it goes back out receipts. That's that's essentially how the operation works. Both these first two projects, we expect to be done plus from.
Minus around the ended the year, so I'm, hoping by Merry Christmas will be able to show people. The real life example of how this is all going to work and and then that the rest to answer. Your question. If for example, we were able to go F.I.D. in September September plus six months is roughly March we do think we can actually fulfill another project in that.
Im frame with this technology, so that would be the next step of it.
That's pretty incredible thank you I'll turn it back.
Thank you and our next question comes from the line of Martin Malloy with Johnson Rice. Your line is open. Please go ahead.
Good morning, just following up on the ISO container method.
In the cost savings there does this open up or broaden the potential customer based more industrial or smaller users.
It does I mean, we already service you know many customers in exactly the same way so and the way that we do it is exactly I'm, describing which as you take it actually container we loaded our terminals now in this case would be loading directly from a shift. We then stick it onto a truck draft to their side have got onsite vaporization.
And we basically drop off the full ones pick up the Mt ones and return them back to the base and repeat the exercise. So we do this everyday and.
Have done a thousands of time, so it's a very tried and true technology very very safe the transport for gas in this way is extremely safe.
We've had a couple of accidents work that trucks and have overturned or whatnot.
No leakage Fortunately no injuries on behalf of the drivers or anybody else. So that's good that you any move assets around you're going to have accidents from time to time, but it's proven to be a very very safe way of doing things and really what when I think of this is simply replacing.
A form of infrastructure with logistics, which happens every day I mean, Amazon you PS Fedex have done exactly this and they've been able to really service our customers much better as a result, and so that's obviously the path that we want to be on for ourselves we feel so really really good about it.
Okay.
And then.
As far as the future projects out there should we expect the usual.
You'll be more likely to own a power generation assets associated with the projects.
It's a mix I think that.
You know in the case of.
Mexico, I think there'll be some of both will own some generation will also be servicing a bunch of customers hopefully on both the utility side as well as on the on the commercial side.
In the case of Nicaragua, we own power down there as well so theres no doubt that power is going to be a big component of our business on the infrastructure side going forward, we had a really great experience in Jamaica budget Melco plant came in on time on budget has performed fabulously I think brand and squad have done a great job operating that so that's that's terrific so that'll be a bit.
Big Big part of it at the end of the day.
Most customers of the world need power right. When you walk up. This morning, you wanted to make sure that you know your coffee pot work to your hair dryer work that you actually have electricity in your house.
And so theres a much bigger demand for power I think in the world and there is for LNG per se.
But in certain cases, where people have got thermal power. This running on diesel is a very obvious switch over to go from burning diesel to burning gas. That's why that chart that I gave you is a pretty handy reminder, for how much savings they really generate from doing so but I think the answer at the end of the days there would be a healthy amount or both.
Great. Thank you.
Thank you and our next question comes from the line of Ben Nolan with Stifel. Your line is open. Please go ahead.
Alright, thank you.
Good morning, West so.
Curious first of all on some of the small scale penetration that you've been able to experience, thus far specifically into making Puerto Rico, and maybe talk to how that has progressed, obviously, it's a really important or the margins, but how that has progressed with respect to winning new.
Smaller customers and.
Getting deeper penetration into the market cigarette.
Yeah, we've had a lot of success I mean, we.
The Jamaica projects.
There are dozens of customers both current and plan.
Sam has been at the forefront of building out a lot of stuff that's been actually extremely successful we continue to make headway in the Bahamas servicing out of our Miami plan, we signed another another new contract last week, we have project and Bimini, which is just taking first gas was over the next couple of days into significant one. So we think that those are those are real prospects for us Puerto Rico.
Just started we did we loaded our first trucks I believe last week right. So that plant is now fully commissioned we've got a number of very significant customers that we think there.
Be.
Very early users of our of our project so.
Yeah, and total we've got 39 contracts 37 different customers. It's 15 in Jamaica, and then the Rosins were scattered around Puerto Rico around the Bahamas et cetera. So it's 39 it could be 390. This time next year.
As a superficial Conversely, but there's there's so much opportunity to displace distillate yields I mean customers care about cost customers care about environmental issues, we care about both sides. So that's that really is a focus.
Okay.
And then with respect to thinking about your gas supply and appreciating that you don't want to be specific on that but especially with the approval of LNG by rail.
Is there any incremental progress or.
Reinvigoration I guess.
The liquid station concept is that.
Or is that still sort of a little bit on positive though.
The the short answer is that we have essentially 100% of the permits in hand that we need to.
Uhhuh LNG by rail we know how safe. It is we know it's the right.
Solution. That's why we spent all the time and energy.
Painting those permits so.
That is something we think is a very.
Appropriate and useful strategy for as long term and with respect to the gas supply stuff I, just really would not prefer to refer prefer not to kind of leg into it we have something specific to share with you all be delighted to do so and I think we will go into very near term. So.
Okay perfect I appreciate it and then last real quick on the on a one dollar per kilogram hydrogen based on what are sort of reorder now any sense of how close you are to being able to get that without sort of actually being able to prove it out but.
Are you closing in on that right.
Yeah, Jake and until this quarter have a better answer my my view is that on the traditional sources. A dollar hydrogen is not really obtainable anytime soon to dollar hydrogen which is still very productive, especially for transport issues. I think is very much a possibility the nontraditional stuff and there are many different forms.
We have seen on that have yet to be really proven out in large scale. There are definitely concepts that produce significant amounts of hydrogen in a dollar or less so.
We'll see that I think from our standpoint, we're probably much more excited about the non traditional forms of hydrogen production and the electrolysis, but that's what the guys you're spending lots of energy on so.
Right I appreciate it thanks.
Thank you and our next question comes from the line.
And with Evercore. Your line is open. Please go ahead.
Hey, guys. Thanks for taking the questions today.
So in terms of.
Getting that 12 18 months relating to investment grade, obviously, theres, a number of credit upgrades that you'd you'd.
To achieve to get to investment grade so the rating agencies, giving you concrete hurdles that in terms of operations or maybe just a pure leverage to kind of cash flow generation that you need to hit to to start started achieving these these incremental upgrades on the path to investment grade.
You know the there's lots and lots of relevant data points to look out of companies that are investment grade and what the what the attributes are those companies both in terms of leverage in terms of.
Diversity in terms of stability et cetera. So there's there are literally a million data points you could look at we've been through many of them. So I think it's actually quite clear that if you had the credit statistics that we have and you had a long operating track record I believe that where we are right now would be investment grade.
And is it sort of these customers. So we understand what the objectives are right now so.
You know the.
The rating agencies themselves are not in the business are providing concrete you know guidelines for anything today. The rating process itself takes into account a lot of different factors. We've had great conversations with them in a really we had talked to them originally probably 18 months ago and it was great to come back and refresh those conversations because essentially what we had hoped.
To achieve what we thought we would achieve happens to match up very well with what we actually did achieve so that's a that itself is a big credential everything and you don't become an investment grade company overnight, but there's really three things that we need we need operating history, which is consistent we need to become more diversified so the five.
Homes that are 90% of our assets it'd be great. If that was 15 or 20 or 25, just a bigger number and then lastly, we need to just be bigger so that not only do have a number of assets, but just the sheer volumes of.
Terminals and assets and customers gets bigger so it's a very very clear path and how we get from here to there and just as a function of the time and focus and and performance we need to get that so okay.
All right so.
I mean, I guess the business sort of growing in terms of step changes, it's not really linear so, but we expect that the rating agency might do multiple notch upgrades that sort of commensurate with the.
New new projects, turning on and just kind of incremental growth you guys that I mean, the way I think about it as if we hit the growth objectives that we have on the new business section I talk to that and we turn on.
For eight new projects over the course of the next 12 to 18 months, we will have accomplished a lot of these goals in terms of the diversity and the size and then the operating history up existing assets creates a new.
Data point everyday and every sharing on and that's why I shared with you you know that page, it's a great deal of detail, but it shows you kind of what it is neat yeah. The vagaries day by day, because customers go up and down they have.
The cells they have issues. They have made this issue there's things that happened every day, they have storms and stuff does definitely happens but.
No doubt that if we are able to having great operating history, and we get to the diversity from another handful of Oh terminals, I think we'll get closer and closer to our goal being investment grade and then the savings would obviously be tremendous on the debt, we're not that heavily indebted as a company nor do I expect to be just given the cash.
Cash flows of the company, but.
It's a good.
It's a good objective.
Okay, Great and and then just quickly pivoting to the ISO containers and page seven we talk about all the active regions can you, maybe just give us a little bit of.
Just more information around which of those reasons, you think that might benefit from from this ISO container strategy and the smaller ship more efficient transfer.
Yeah, I think the answer is all than do when you do you think about it for the large scale customers having.
So and offshore onshore LNG terminal makes a lot of sense. So if you have a customer that is using million and a half or two or 3 million gallons a day the traditional FSRU and long term terminal makes a lot of sense. The customers that have got the here's a good rule of thumb is for every 100 megawatts of power you use about 200.
50000 gallons per day of LNG, So 10000 gallons per a container. That's 25 moves that's a so from 300 megawatts you'd have 75 moves today, which is over 24 hour timeframe is just not that many trucks and container. So that's the way to think about dimensioning, and obviously, if you're going to.
In a situation, where you've got two or three or 4 million gallons a day from a single customer group of customers, having a different solution makes a lot of science, but I think on balance you'll find there's many many more applications in the world for people that have got smaller scale needs than the large scale needs and I think in terms of the time to deliver the diversification all the things that does.
For us it's incredibly positive so.
Okay. Thanks, so much turnover.
Thanks.
Thank you and again, ladies and gentlemen, if you have a question at this time. Please press Star then one.
Good question comes from the line.
Thanks.
With Barclays. Your line is open. Please go ahead.
Hi, Good morning, Thanks for taking my question just first on the legacy Centrica cargos better scheduled for 2021, how should we think about those and when you look potentially revisit those similar to the cargo did in 2020, just as you build liquidity with your facilities ramping up through the end of the year.
Oh this great question now the the ink is barely dry on the existing deals we haven't focused on 2021, yet and I went through the numbers in terms of the relative.
Your needs we have in the business, where we are to kind of show that we still have a substantial open position.
It may make sense.
For us to do a similar transaction at the first part of next year would depend on.
Their needs as a counterparty and so it's a it's a very friendly conversation, obviously and so.
Right now we still are about 65% open with existing volumes and I think that that number is going to go up not down because we do think we're going to need a bunch more gas for customers that are in the pipeline right now, but I think for the moment.
We just assume that we burned those cargos as they are scheduled to come in and we'll make that decision that adjustment later in the year as the year passes by.
Okay, Great and then shifting the capital allocation the commentary on the dividend strategy was helpful. I think your answer to the prior question touched upon this but just wondering if you have like a run rate leverage target in mind as well.
We do I mean, our goal long term has to be less than three times right I think thats kind of where we are right now honestly. So we think.
Three and less is the.
That's the region, where you get investment grade consideration and I'd also is what we think is reasonable given the potential disruptions from anyone asset or a series of assets et cetera. Those are all considerations that we take into account, but we think that three or less long term and we think with these growth numbers it could be substantially less than that frankly.
But.
But that's a that's kind of the guide posts.
That's helpful. Thanks.
Great. Thank you and our next question comes from the line.
<unk>.
Two brothers your line is open. Please go ahead.
Good morning.
To start with on your new ISO flux model.
You see the surely enhancing the value of your first mover hub and spoke central American and Caribbean Bunkering strategy and his ISO flux. The reason the nicaragua's timeline is moving up and is there any size project.
Flex is not the ideal solution.
I'll take them in reverse order and the size is an example of use before so there was a very large project I think would make more sense and long term to have a fewer logistics fewer handling of the of the product and so have the FSRU that is anchored for us off the coast of Jamaica right. Now is a good example of that.
The.
The answer to the second question is yes, specifically the reason why the timeline on Nicaragua has been advanced is specifically because of this solution. So that's a kind of real life manifestation of why we think it makes so much sands and we and we really believe that the.
Having the ability to.
Again service each of the parts of the value chain is what gives us the really the competitive advantage. So none of these things individually I don't think is that complicated, but you need a big shift and you need manifolds eat ISO containers, and you need trucking and logistics and you need power and you need vaporization any need all those things and it'd be helpful. If you have.
All the capital to pay for it so.
There are certainly will be competition and there is competition for us in the world, but the world is still under electrified and so in need of these projects and they don't need a project that turns on five years from now they need a project that turns on now and that that is at the epicenter of why I believed that the the solution is such a meaningful one because a thousand megawatt or 2000 megawatt.
Got you know ammo you I've seen the assigned to all these different countries around the world. This as it's going to deliver in five years. It's just not that it's just not that related but it is not does not address with the issues really are and I think this the project in Nicaragua is a very good example of something thats meaningful to the country is the first new infrastructure has been built on the power side and along.
Time, it's been done with gas, which is much cleaner and much cheaper than the alternative at the moment and we think that there are you know many many many of those solutions around the world that are need.
And on the hydrogen.
In terms of your own degeneration, and customer generation, which used to play fuel.
What is the Max hydrogen the can be in the fuel mix with existing turbines.
15 turbines the GE folks tell me can burn up to 95% hydrogen today. So the answer is a lot I mean, so the answer is a lot.
Right and we that's why I think that we're so focused on hydrogen be as an alternative because the infrastructure that we are busy developing all of the world is then very usable for so if we were able to come up with the hydrogen production capability that actually.
Magically generated the dollar hydrogen which of course, that's the goal you would turn it on your plans immediately and that's our real value as a potential customer and partner of these different.
No.
Technologies, because we could actually like ourselves obtain proof of concept by using them on our existing assets.
Interesting Okay last question on the long term.
LNG supply concern.
Which 10 years from now may not be a concern if you come up slightly since so.
Oh, but ER.
Where does infield small skill liquefaction opportunities.
Fit into that that solution long term for us.
Yes, it's interesting we looked hard at it.
Four years ago, I guess as I spent a lot of timeline and there are there theres lot of gases flare the world. So it seemed like it was a sensible way this take Liquification, two places where they're flowing gas and I think it would that in fact is true.
And when I looked at some examples actually did some field trips and actually saw places where it was being deployed so I think it's actually interesting.
We could never really get a clear sense of the numbers, though actually I mean, I asked a very very simple question, which is.
Every molecule that goes in how many molecules come out I mean, not over simplify but just trying to figure out how much was being used in that process and I could never get really the numbers to my satisfaction that led us to believe that it was a great solution long term, but I think there's still a lot of gases flare the world that could be definitely look liquefied in that manner.
I think that there are people that are working on that I don't know, how how that would fit with the scalability of what it as it were trying to accomplish so but I think it may be viable commercial in is probably is certainly desirable environmentally if you could do so so I would applaud efforts to do that but I'm not sure the application for us given the scale what our businesses is it's turned into it.
The the right answer so.
But let's see even apart from solving the flaring issue and creating a win win for you in the world.
In terms of like what you have the opportunity in Pennsylvania, Marcellus and deploying that in other locations, where you actually control and own long term.
No known liquefaction lie.
Without owning the reserves.
Could I know in today's market with world Awash with LNG enough I'd in Pennsylvania sounds knotty, but as you look out a couple of years through things like this really fit into the long term solution.
Well I think that the answer is absolutely at some point right and.
And we're looking at a lot of alternatives in the sense now to I don't want to be evasive about not answering questions directly but I just I don't really want to give partial answers. So.
We think that Theres a lot of different ways to accomplish what we want to accomplish and inlets and let's just leave it at that we have some more specifically about and I think it will be sooner than later hopeful it so.
Great. Thank you.
Thank you and I'm showing no further questions at this time and I would like to turn the conference back over to Mr. question for any further remarks.
Right No no real close remarks, thanks for all the other questions. This morning, and thanks for the interesting and calling in and look forward to talking to hopefully the end of October right Chris.
Thanks My thanks.
Ladies and gentlemen, this does conclude today's conference call. Thank you for participation you may now disconnect everyone have a good day.
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