New Fortress Energy Inc. (NFE) Q3 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the NFE Third Quarter Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker, Alan Andreini, Head of Investor Relations. Please go ahead, sir.

Thank you, operator. I would like to welcome all of you to the New Fortress Energy Third Quarter 2019 Earnings Call. Joining me here today are Wes Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer; and Brannen McElmurray, our Chief Development Officer. Throughout the call, we are going to reference the earnings supplement that was posted to the New Fortress Energy website today. If you have not already done so, I suggest you download it now. 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, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and 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 SEC. Now I would like to turn the call over to Wes.

Great. Thanks, Alan, and thanks a lot for dialing in. We'd just give a little bit of a summary of that in the presentation. So we had a very good quarter in Q3. Our focus as we continue to build and develop the business is to get our assets turned on and operating and continue to find new markets to explore. In both regards, we continue to have a very, very good quarter. Brannen will talk in a few minutes about our development projects, but basically the focus that we have is very specific. We need to complete the construction and finalize the operational readiness of 2 power plants in Jamaica that constitute the bulk of the volumes that we expect to come on board during the next year. In Puerto Rico, the terminal itself is very close to completion. Again, Brannen will give an update on that. Simultaneous with our terminal building, PREPA has been working on the conversion units 5 and 6. We will continue to do that accurate look at all that is on pace. I'm told many of our investors have been asking about it. You have to see it to really appreciate it. We'd love to have people take a look at these new facilities, when you get a chance because you'll get a sense of both the scale and the efficiency that we have done there. Second of all, in addition to those very specific focuses, the subjective part of the business to continue to grow and develop new markets and new terminals for us. And we've had very, very good progress here. Having managed discussions on 3 different terminals in markets that we think are likely to convert in the next 60 to 90 days and many other discussions around the world in the 100-plus locations that we've identified as being interesting and actionable for our products. The transformation of our company from an infrastructure and development company to an infrastructure operating company is literally days away from completion. So with that, please turn to Page 1 of the supplements sent out last night. I'll run through this briefly. As I said, developments are nearly complete. Old Harbour has been using [indiscernible] gas intermittently [indiscernible] distribution process. Again, Brannen will talk about that specifically. The plant will be in their building in Jamalco. First fire is the gas through the system. They managed to do that, sync that up with my birthday on October 30, which I really appreciate. That's actually been going great. The terminal readiness in Puerto Rico is nearly complete. Mexico is a full construction site expected to be operational by August of 2020. The new terminal pipeline is very robust. The backlog is substantial. We've got 2 large-scale MOUs that we do expect to turn to binding commitments in the next 60 to 90 days. The scale of those combined on their initial volumes, 1.3 million gallons. I returned Sunday from a trip to Asia, met a lot of people this week on a trip to Central America and South America, and the next week, back to Africa. So there's major markets around the world. It's a lot of running around that we're trying to do so, and we're very, very optimistic that our business is well positioned in these different places. Third thing that I want to spend a few minutes on is demand aggregation. Demand aggregation, in very simple terms, is what I think is the lifeblood of the business. And I'll go through it in a little bit more detail, but simply put, it is identify a place where you can build a beachhead, get a terminal built, get a reasonable return to enter a market and then aggregate demand from other power users, small-scale commercial users and then lastly, an area that we think has tremendous promise, the transportation sector, particularly in the shipping side, to use those terminals. As I said before, the infrastructure business is you want to boost all your money, build infrastructure for one purpose and don't use it. If you want to make very substantial returns, build into one purpose and use it for 2, 3, 4 or more. And so we've seen ample evidence in how this really works in practice, and I'll walk through that in a second. Lastly, the financing part of the business continues to through its pace. We got very good progress on that. Chris will talk about that later. Basically, the goal is a very simple one. We intend to continue to raise capital against our assets as they become operational and as we start to do some cash flow and do so in sufficient quantities and at yields that allow us to internally develop all these projects that are on our board without having to go to market for more equity. So it's not to say if there was some extraordinary circumstance, we will equitize the company. But based on the business that we have in hand and the finance-ability of our balance sheet, we need to internally finance everything that's in front of us. I'm more confident than ever that the demand for clean, affordable, fast power is a gigantic market opportunity, and we're very happy for the business to develop. So let's flip to Page number 3. This is a map of Jamaica, and it's a great illustration of the aggregation point I was talking about earlier. So our first entry point in Jamaica was 2016. At the top of, or the middle of the terminal to be at Montego Bay to service that first 120-megawatt power plant. The company, since that time, we continue to expand the revenue [indiscernible] island in both the power sector, industrially to a handful of our industrial customers down there and lastly, in transportation and development sector, and soon we'll [indiscernible] on the shipping side. If you flip to Page 4, you can see kind of graphically how this has actually added up. So at the bottom we show that pre-NFE, there was zero gallons per day at the market. So there's no natural gas that's used for these purposes in Jamaica when we started there. We didn't have the one dot on the map, this first beachhead, which is up in Montego Bay. Today, those assets have grown and multiplied. So you've gone from 300,000 gallons per day to 1.2 million gallons per day. We think that the future is a 2-plus million gallon a day mark. If you look at Page number 5, we looked at the 3 places we are in the business [indiscernible] in the case of Mexico. So Jamaica, Puerto Rico and Mexico. Committed volume was 1.2 million gallons and 100,000 gallons, 500,000 gallons for a total of 2.6 million gallons across those. So that's the basis of our core financial projections we've got for next year assuming no additional growth, which, of course, is not going to be the case. In discussion volumes, these are specific conversations that we had with our specific accounts that adds another 1.5 million. Those 2 added to just over 4 million gallons per day, and that compares to 19 million gallons of addressability in those markets. So only about 1/4 or 1/5 of what we think is potential there. And when you are in the position to be building infrastructure and provide local logistics to support and marketing and everything else to back up your operations, your ability to outperform your competition is significant. Page 6 is the chart that we showed you last quarter. This basically is the path to cash flow on these assets. As you can see, we're getting modest amounts of cash flow now. And then Q1, Q2, Q3 and basically, you're fully ramped at that point [indiscernible] at the second half of the year. I said before that we have more fun in the earnings call than we have earnings, but we are literally days away from that being the case. You can see this stuff turn on. These are base numbers. These are not expected numbers from what we think will actually happen, so we're not forecasting these are the numbers. We think we'll do significantly better than this, particularly in the second half of the year. There's a gap between identifying new investments and then what we're actually getting built and then turned on. So this is the second half of the year and a 2021 issue, but we think that the backlog we've got, this is just a good starting point for us. So lastly, just 2 seconds on the terminals and what we think just to provide context for the overall business. So 4 terminals are completed or under construction. There's a map of the world below. What we've done is highlighted the 10 areas that we think of interest. Those represent 50 countries approximately in need of fast and affordable and clean power, that translates into roughly 100 potential terminal sites worldwide. Our goal, in very simple terms, by the end of next year is to be fully committed and/or building and/or operating 10 terminals. So currently, we have 3 that we are operating, including Puerto Rico, which is turning on here in days; one under construction in Mexico; in discussion, 3. So our goal is 10. There's not a significant stretch based on what we're seeing the market availability is. And just to make a very simple arithmetic of what that means for us, if we flip to Page 9. We use the target volumes per terminal of a range of 1 million, 2 million, 3 million. So 1 million to 3 million, which we think is consistent if you look at [Indiscernible] at the previous page. And most part of that time is 10 terminals and whole operating margins consistent with what they are right now, you're talking about generating EBITDA for the company between $1 billion and $3 billion. So again, in very simple terms, if we are able to A, complete the development of 10 terminals committed by the end of next year, fully operational by the end of 2021, [have] these launch and have a company that is able to generate run rate EBITDA -- actual EBITDA to $1 billion and $3 billion. So the -- this is just mentioning the illustration. Obviously, we think that the market is substantially greater than 10 terminals. So it is a very short-term focus, and it's our perspective of the company. So with that, I'll turn it to Brannen.

Yes, great. Thanks, Wes. Good morning. Thank you all joining us. I'm going to refer to Page 9 -- Page 11. So as Wes kind of indicated earlier, the key developments we have that will be operational in 90 days are the Old Harbour, Jamalco CHP plant and the Puerto Rico facility. For Old Harbour, we expect to hit the run rate by the end of this year. For Jamalco CHP, we expected it to run rate by the end of Q1 2020. And the San Juan, Puerto Rico facility, we expected the run rate end of Q1 2021. I'll flip to Page 12 to kind of give you more detail on that. We had a very productive quarter with our terminal projects progressing on pace to deliver as expected. About 80% of our committed volumes come from 5 projects. First, the Bogue power plant, which is served by our Montego Bay Terminal which is operational today. We have committed volumes of 310,000 gallons per day and expected volumes north of 340,000 gallons per day. The initial 120-megawatt baseload demand has grown to 150 megawatts since the time that we've started operating as we think it's indicative of how the terminals will kind of behave generally with the base demand growing after we actually put the terminal in place. The second asset we have is the Old Harbour power plant, which is owned by Marubeni and its partner, and served by the offshore facility in Old Harbour. That facility is -- that power plant is operational today, and with committed volumes of 360,000 gallons per day and expected volumes north of 380,000 gallons per day, we expected that facility to hit its run rate volumes by this month. The underwritten 190-megawatt power plant we expect to be closer to 210 megawatts. So again, outperforming the initial expectations, case by case. The third asset we have is the Jamalco power plant, which we own and served by our offshore terminal in Old Harbour. That's in the commissioning process. And as Wes mentioned earlier, we first fired that October 30, and as of today, it's providing power to the grid. So we expect that to ramp up over the next 60 days and hit its run rate volumes of about 285,000 gallons per day. The fourth asset we have, which is the San Juan Terminal, which serves the San Juan 5 and 6 power plants, owned by PREPA is being converted. The conversion is in process and progressing very well. The first 220 megawatts, we expect to be completed next month. The second 220 megawatts, we expect to be completed in January, and we expect to hit our run rate volumes there in Q1, which is 1 full quarter than what we talked about last time we spoke. The fifth asset is 105-megawatt power plant owned by us in La Paz. It's served by our La Paz Terminal. Construction in progress. The first turbine has been completed, and it's ready to ship to site. The second turbine is almost complete, and we think we'll add a third turbine to that facility and increase the overall output. It's about 130 megawatts. First gas is expected in Q3 of next year. We have a large and growing pipeline behind that. And as Wes mentioned earlier, we're highly focused on several large-scale projects that we expect to commit to here shortly. I'll flip to Page 13. As Wes mentioned earlier, one of the key aspects of the business and a huge growth driver is our demand aggregation strategy. So our terminals should be thought of as beachheads, from which we aggregate demand across the power, industrial and transportation sectors. So our small-scale distributed power business is the key driver for the business overall. So today, we have 15 projects that are operational and the teams has turned on 6 new customers since Q3 of 2018. There are 10 projects under development, all are expected to be completed in the next 180 days. There are 126 projects that are in discussion. We expect that 15 commitments by the end of the year with over 1/2 of those volumes in Puerto Rico. So what that means is there will be a total of 1 million-plus gallons per day of committed volumes plus in-discussion volumes, which is an increase of 25% year-over-year. Now I'll say a few things about our operational and financial performance for this quarter. As an operating business, the health, safety and welfare of our people, stakeholders and the environment is a top priority as it always has been. For the quarter, we continued our record of no HSE operational incidents, which include 0 days away from work, 0 reportable health or safety process events and 0 spills or environmental and payment losses. On the asset side, we had 99%-plus availability across the operating assets, the 99% availability across, reliability across the operating assets. So overall, extremely strong performance from the operating team, and we continue that just to get better over time. What we're probably most proud of is we have almost 5,000 LNG truck rail to ship transfers without incident. We have the most ship-to-shore transfers of any company in the Western Hemisphere, all without the incident, which is a huge vote of confidence for our team and plus a big brand event for us for our counterparty. Now I'll turn it back to Wes for gas and shipping.

Great. Thanks. Been asked a lot of questions over the course of the last handful of months about the gas markets. And I think when you look at the aggregate numbers on the supply side, there's actually only been a modest amount of supply increase. So as you can see from this stage, 389 million tons rising to 448 million tons. So capacity is only up about 15%. But this is a commodity that's very hard to store. So when you make LNG, you need find a place to put it. There's not a lot of storage for it. And so even a modest increase in supply can cause a fairly dramatic change in price, and that's exactly what's happened. So gas prices, spot prices down roughly 50% over the course of the year. When you look at the supply-demand technicals, what we think of it is it is fairly easy to add a [indiscernible] in that it's fairly easy to add trains and bring capacity online. So it's that they tend to add supply in 5 million-ton increments and demand side is sold basically 1 turbine at a time. And so when we look at the overall markets, and we think the prospects are for the business, I do think that those 3 trends will catch up and reverse themselves because we think that overall demand worldwide is going to be very, very substantial both in our power businesses. And as I said, 2020, it is now all about 50 days away. And with that comes the 2020 low-sulfur fuel guidance. That's when it starts to have substantial impact, I think, on the shipping industry, not immediately but over the next handful of years. And you can see that what's happened in the short term is this very modest increase in supply has caused a very substantial change in price. And that's what leads us to the opportunity that we think we have, which is now to go and lock in some new volumes for an extended period for what we think are very good prices. We've been running a tender for the last 45 days or so. We've had 10 different people that have tendered for. We have a number of very competitive suppliers. We're just finalizing the selection of who we want to go with and what the terms of that might look like. And we expect to complete that by the end of the year. Chris?

Yes. Great. Thanks, Wes. Good morning, everybody. Turning to Page 17. Let me take just a quick minute to walk you through the financial performance for the business for Q3. Compared to Q2, Q3 volumes were down slightly, and that was due to the planned maintenance outage at the Bogue power plant. This will rebound, and we expect around 600,000 gallons a day for the fourth quarter. Despite the lower volumes, however, both revenue and expense were higher for the quarter. The increase is due to about $10 million of construction revenue and a corresponding $9 million in cost of sales related to improvements at our customer facilities. This will normalize as construction concludes and the terminals come online. Contributing to the net loss for the quarter was approximately $8 million in noncash stock comp and about $16 million of costs associated with development projects in Pennsylvania and Puerto Rico that were not capitalizable. A quick comment on SG&A. We expect this to level at about $20 million per quarter after working through these onetime events. On the balance sheet, debt went up from the prior period associated with the funding of $117 million of the $180 million facility on our Jamalco CHP plant. Cash was flat from Q2, but we spent, as we spent about $80 million on project-related expenditures during the quarter. And I'll repeat something that we said in Q2, which is that cash on the balance sheet plus the undrawn amount from the NCV loan fully funds all of our committed projects. Turning to Page 18. This outlines our plan to use leverage from operating cash flows to finance the business. And the key steps to accomplishing this are to: one, turn on the assets; and two, source low-cost LNG. As our assets go to being operational, the financing path changes substantially. Our goal is to borrow against the operating assets once they're online, which, in turn, funds the development projects. As our performance proves out, we expect to be able to borrow more funds at an even lower cost of capital. Further, we expect to double the amount of debt on the business from the IPO, while holding the overall cost of debt flat. In order to accomplish this, we expect that we'll be able to increase the size of our term loan from $500 million to $800 million, which combined with the cash borrowed locally in Jamaica, is a total of about $1 billion in debt. On the bottom of the page, if you look at the graph, the operating margin on run rate goes from $169 million to over $380 million in the next 4 quarters. Using this operating margin goal and applying 3 to 5 turns of leverage implies a debt capacity of $1.1 billion to $1.9 billion. So we think that starting at $800 million is a reasonable step in that direction. We've had a number of discussions in putting this facility in place, and we feel confident in our ability to do so over the next 90 days. In conclusion, we intend to use leverage to accomplish our goals. I will note, however, that once we hit the goal of 10 terminals, we'll have more than enough cash flow from operations to fund growth. With that, I'll turn it back over to Alan.

Operator, you may now open the call to questions.

[Operator Instructions] Our first question comes from the line of Devin Ryan with JMP Securities.

Obviously, a lot going on here. So I guess first question. When I look at Slide 4 on the progression of the business in Jamaica, it seems to be a good case study for development in your other geographies. And I appreciate that the development is not always going to fall into kind of a smooth time line or something's going to occur faster and slower. But it feels like maybe some of the development in the quarter was a bit slower than we had modeled. So just want to think about maybe Jamaica as the case study here, whether you saw some similar developments there? And again, I appreciate you're not building the business for 1 quarter, and it's a long-term strategy here. But just how Jamaica and the time line there and really just the overall experience there affects kind of your view today of kind of the development in the rest of the geographies that you're in.

Great. Well, if you look at Page 5, where we actually detailed the market size for each 1 of the geographies. So Jamaica, in our estimate, this is a very granular estimate of the 3 kind of elements of how our small-scale development and transportation is for market size of 6 million gallons per day. That does not include a significant launchfor the shipping business, which I think could be significant given the geography in Jamaica. So I touched on it earlier when I said I thought that the shipping stuff would be -- will be a big thing for us. To give that some context of that, every ship that is an LNG power ship or it's a container ship or a tanker ship is going to use something between 50,000 to 70,000 gallons of LNG per day. And that is essentially a 365 day in, day out use [Indiscernible] of it. There's tons of research data articles about the viability of LNG versus other forms of fuel, and there is no doubt in my mind this is going to play an increasingly significant role over the course of the next couple of years. But these, if you take our numbers, we're looking simply at the domestic volumes. And I'll say this, that the -- yes, we recently centralized all of our small-scale development with one team, the global teams. They have been -- that they can utilize. We've got over 100-plus customers between each one of these locations that is currently in some form of discussion before this. And while it does take some time to get from here till we get it turned on, what we have done to capitalize this is we basically provide all the development capital for our customers. And to the extent that we can, we also provide the operational capability for us to step up and actually complete the projects because somebody agreeing to do it is not as helpful as actually having us then step in and help them with all our capabilities. So I would say that our perspective is that this part of the market with 100-plus customers on the small-scale side between these 3 markets is going to be a material addition on the business. It's very high-margin business and we've already paid for the infrastructure. So for example, I was with a big resort owner about 2 weeks ago, told me their electrical bill in one of those markets is $250,000 a month. And to convert to CHP with our operation and our prices, we'll reduce that $250,000 by about over $1 million a year. Still a very good margin business for us, still a very, very positive impact on the environment and very significant savings for them, both in their current resort and their growth plans for it. So small-scale business, I think, is really the -- this is part of the demand aggregation. I think it's the secret weapon of the business. It is definitely a ground war, and that it's a day-by-day business to go after each one of these companies, but we feel like it's going to be a big, big contributor to our numbers going forward.

Great. Thanks very much. Just a quick follow-up here, Wes, on the LNG pricing and with respect to the $5.50. How much can you or will you secure at that price? And then what duration are you guys looking at based on, I guess, your comments on supply demand and expectations for kind of longer-term pricing there?

I think that you will end up with 80% to 85% of the visible demand on day 1 is probably the, is what we're thinking about right now. We have looked at offers in 5-year, 7-year and 10-year. I think at this point, I'd probably lean more towards the 10-year solution. I think that's probably the right amount. We, look, we think that the amount of LNG that we're securing here is fractional compared to what we will be using as these terminals develop and other new terminals prop up, but this is an important step for us. We think it gives real viability to our financial plans, both trying to accomplish on the financing side to marketing [indiscernible] this part of it. Gas and ships collectively are roughly 80%, 85% of our overall expenses. So those 2 things being locked down are significant parts of the puzzle. And as I said, I expect that we'll complete this by the end of the year.

[Operator Instructions] Our next question comes from Greg Lewis with BTIG.

Yes. Just following up on the last question about the $5.50. As we think about the cost of LNG in the third quarter, you called out that it picked up kind of related to some, I guess, maybe some transient costs. As we think about that $5.50 number, realizing that it probably isn't going to happen overnight, how should we think about the scaling down of the cost of goods sold over the next few quarters or few years?

I think our expectations, we're going to have the $5.50 number on a run rate basis next year. So whatever the number, hopefully [indiscernible], it's $5.75 or it's $5.25, I think it's a very tight bandwidth on it. And I think our expectation is that we'll be able to bring that LNG in the house so we can actually realize that in our run rate numbers starting next year. So hopefully, the fourth quarter, you'll still see legacy LNG prices. And then the first quarter, I should go back to this number, which is that's our goal. So.

Okay. Great. And then the other comment that it seemed like we're kind of the, clearly, with IMO and the potential shift to more LNG on the water. As we think about New Fortress and where they fit in this value chain, is this something where we can just build on the existing beachheads to kind of deliver LNG fuel to like, how last mile should we be thinking about with the delivery of some LNG into the marine market? Like, is that just more [indiscernible] terminals? Yes. Go ahead, sorry.

Yes. No, very last. I mean as Brannen said, we have completed more ship-to-ship transfers a year ago in the hemisphere, maybe more ship-to-ship transfers than any company on the planet, right, if you really look at it. The providing LNG as fuel to a ship is a ship-to-ship transfer. So we have today kind of the proven capability unmatched by anyone, frankly, in terms of creating small ships and provide fuel into other ships. So our goal is to use these terminals as storage vessels that use smaller ships to act as shuttle vessels between big ship and other ships that could come in. When you look at a shipping map of the world, all the different ship lanes, there's a number of very obvious touch points that we think are going to be critical in the providing of that various LNG logistics. Those are the points on the map that we're focused on with regard to this particular part of it. And I think it may be the kind of situation where we partner up with different shipowners or different people that have a strategic foothold in the business. This is a, the world is a big world and the volume of LNG across it is a tall order on an individual basis. But for the information of others, we use something that's very, very viable. And as I said, when we first looked at the impact that shipping can have on us, when you look at our training, this is the first part when we converted way back in Florida. Florida East Coast Railway, the biggest regional railway in the Southeast. Total diesel utilization of about 10 million gallons per day is a big individual transportation asset. That base can be pooled into one 5,000 container ship in terms of the energies during the course of the year. So it is hard to speak about the shipping markets without using superlatives and the developing market, but there's no doubt it's going to be a big impact on our business over time. It is something that is completely unmodeled at our numbers. We use very, very little over-projections because it's something that's not tangible enough to put a number of new estimates to pass on to you all, but I feel this is really, like, this is going to be a significant, I don't want to force it. I think that the company and the group that has access to the most important logistics points and the most important terminals is the one that's going to really be a winner here.

Our next question comes from the line of Devin McDermott from Morgan Stanley.

So I wanted to just start just actually following up on some of the prepared remarks. And the first question actually, looking at the scalability of the platform once you enter a new market. And I agree that Jamaica is a great example of the kind of operating leverage and opportunity set that you have once you reach first gas in a certain area. I wanted to talk just a bit more about Puerto Rico and Mexico, both being relatively large market opportunities here. If you could just contrast the competitive landscape there and how similar or different that might be from Jamaica? And also within that, if you could address the geographic benefit that your terminals might have versus their competitors in those markets purely for Puerto Rico when you look at the industrial customers or other customer base that might be there.

Well, it's in, it's actually really simple. Jamaica, there's no other source of supply currently beyond for gas. There's LPG, there's diesel in the logistics field. So I think a lot of development in these markets for energy following the easiest way to report, and oil-based products are easy to handle, easy to ship, easy to build a tank for it. Unfortunately, they are expensive, dirty and volatile in price. And so that's what, that's the big picture and remains an opportunity. For Jamaica, right now, we're the only source of natural gas. And because of the largest customer, which is a utility, is our customer for the long term, it is a tall order for somebody else to step in and build a terminal. They could, of course. It's a big island. There's other things you could do. But from a commercial standpoint, we're in a very good place. Puerto Rico, we think it's a similar situation in that there is another competitive difference in gas, but they bring in international containers and they're bringing in from the U.S. Mainland. And so just the raw cost of shipping is a material hurdle for them to overcome. We're shipping from our terminal in the middle of San Juan to customers around the island. They're shipping from the U.S. Mainland and has containers on the ship. And so that sounds hard and expensive, it's because it's hard and expensive. And for customers, it's not only the cost of the LNG, but for them, this is a critical must-run asset for them. Maybe even power, 365 days a year to run. I don't know, there's stormy places, you get weather events, you get different things that can actually, like, interrupt supply chain. So I think both in terms of price, logistics and certainty, I think we're doing very well. Mexico market is, we look at Baja, California. It's fixed down at the end of Baja Peninsula. It is essentially an island. There's no source of gas that comes down in the Peninsula from California. There's no source of gas that comes across the Sea of Cortez from [Indiscernible], a place in the mainland. So our terminal will be the first, and quite possibly, the only near-term source of natural gas, both for our plant users in Mexico and Cabo. If you're familiar with Cabo, obviously, those are the -- resort community there is gigantic. It's a terrific vacation spot. Obviously, there's a number of very large resorts there. Those, we think, are going to be significant customers for us. So competitively, they're not monopolies by any means, right? So we don't use that word. We don't like the ring of it, like a monopoly, we're not. But from a competitive standpoint, we're in a very, very good competitive position vis-a-vis any competition. So I think, really, your competition is just a matter of can you execute? How do you execute? Can you staff it properly? This is just work. It's not actually a question of viability or ability to access this market.

Great. No, that's very helpful. And then my second question is on the 2 large-scale MOUs that you mentioned in the prepared remarks being closer to your conversion over from commitments. Is there any additional detail you can provide at this point on those potential deals, what they look like, location, anything else there?

We don't want to provide details on them until they're turned into binding commitments for obvious competitive reasons and whatnot. They have been -- both of those 2 situations that are in hand are a product of months and months of discussion, negotiation, both are cases where customers will benefit very substantially by the introduction of gas and alternative fuel. So I think that the likelihood that they convert is high. As with any transaction, it's not done till it's done. But we think they're both new geographic areas for us. They both have markets that are, in both cases, are substantially greater than any other markets we look at. So we feel really good about not only the short-term viability of the kind of beachhead in terms of initial transaction but also the long-term prospects for growth. So as soon as we have binding transactions, of course, that will be a material event for us. And I'm hopeful that we'll get, as I said, a couple of moves down in the next 60 to 90 days, maybe even less.

Great. Thank you very much.

Thank you. And our next question comes from Ben Nolan with Stifel.

Good morning. So I -- maybe following on the last question, but maybe not. Wes, one of the things that you'd pointed out was the importance of developing beachheads, and obviously the 3 really good beachheads now. Although you've elucidated on 3 others in the past: Angola, Ireland and Dominican Republic. But none of those have yet turned into solid contracts. Is it harder than you thought maybe to push those across the finish line? Or is there any change in the competitive landscape? Or they're progressing as you thought?

It hasn't been harder than I thought. I think it's when we look around the world, I think it was 148 gas terminals [Indiscernible] gas importation terminals, the largest number of those are in China. A lot of them in Southeast Asia last week for a handful of days, and I'll say is the gas to power notion is one that is not only viable but is now thought as the kind of go-to standard process for people to bring new energy into powering their markets. These are big decisions by countries or by utilities on countries and whatnot to make, and there's a lot of complexity that goes into it. And so I think in the context of all the things that have to get negotiated, it takes some time to get them from here to there. When we print out a brochure, and we can show our facilities and what they look like and what our operational characteristics are, that's very different from somebody showing a PowerPoint with Microsoft. So I think from a competitive standpoint, I feel really good about our ability to access these markets. I'd say that the, what we thought about the business a year ago has proven not to be very much the case, which is it's reducing about the number of competitors that want to provide some aspect of the solution. I mean we want to build a power plant, we want to build a terminal, and we want to do small scale, we want to provide gas. You still see actually a relative lack of people that hold to all those things collectively. And most importantly, people that have the ability and the willingness and the wherewithal to build and pay for it themselves. And this notion of demand aggregation, I think, is the most critical aspect of it. What I do see in a lot of the situations we're involved in is the competitors are looking for something, which is a 25-year, hell or high water, 100% solution for their entire terminal. And we're willing to accept less than that with the notion that we'll get demand that will aggregate in the back end of it. That has proven to be a very good decision in Jamaica, I think it will be a pectacular decision in Puerto Rico. I think we'll see this over and over. So, but there's no doubt it's a competitive landscape. I think the other reason I'm traveling 200 days or so this year is that we've been getting out in front of these markets of the, again, if you look back at the map we provided there, 50-odd countries, 100-plus locations. Our goal is to get another 3, 4, 5 by the end of the year. I don't think it's a lot to go. I do think that if we're more fortunate and excellent at what we do, the number could be materially higher than that overtime. So, and the math on what happens as those terminals gets fully deployed and built out is staggering, right? There's really not any business that we've been associated with where you can say, I need to do these 3 or 4 things and generates $1 billion to $3 billion of EBITDA. And that sounds like an oversimplified comment but it's just true. So, but there's no doubt that there is the demand for it. There's no doubt that there is competition, but I still think there's a lack of competition that approaches it in a comprehensive manner.

Great. Okay. Helpful. And then another thing, and you talked about supply. And obviously, prices are pretty attractive at the moment and we think will stay that way for a little while. But you didn't bring up the liquefier at all. Could you maybe update us on what's the thinking there or where that stands?

Sure. Brannen?

Yes. You bet. This is Brannen. So on the liquefaction side and why we'll say, you kind of saw a satellite image of the site, it's a clear level and ready for vertical construction. We kind of put it up for the winter. We have all the permits in hand. So those hurdles have been cleared. Everything is heat up for once the decision would be made to go forward on that project. On the other side of it, we're working on kind of a few loose ends on the export side. But I think our belief is it's a great project economically on a stand-alone basis. I think as you rightly point out, given where LNG prices are in the world, I think we'll kind of take a look at both options kind of side by side. And then once everything lines up for liquefier, we'd make that as an independent decision.

I mean there's no doubt in my mind, our minds that long-term having an oversupply in some part of the portfolio is the right thing to do. I think if you use the numbers in Pennsylvania with gas and the price that we're talking about, the cost of liquefication and transportation, you end up with all-in LNG price of about $4 delivered to the terminals. So that's still a substantial discount to the $5.50. It provides a real economic incentive to do so. Lesser incentive today, just given the supply-demand characteristic in the overall market. But over time, I think it will definitely be a good part of that. Not something that has to happen tomorrow. I think I said, you build it 5 tons at a time. You sell it one turbine at a time. So those 2 factors are not going to reverse themselves any time soon, but a clear summer is somewhere in there.

And then lastly, really quickly for me. Chris, is there, could you maybe update us on the CapEx program, and if there's been any changes there? I think you mentioned maybe adding an extra turbine in La Paz. But how should we think about CapEx going forward into 2020?

Yes. So that's right. Brannen did say that we were adding a third turbine in La Paz, which increased CapEx by about a little over $20 million. But as we looked into 2020, there's really no change except for that $20 million we spent on as expected during Q3. Q4 is looking to be on the exact basis kind of what we were flashing in previous quarters. So really, no major change then from a CapEx standpoint as we look into 2020. Everything will be fully built with the cash on hand plus the $63 million remaining from the NCB facility.

And the next question comes from Craig Shere with Tuohy Brothers.

Two questions. First one, very, very quick. Did I hear correctly, Chris, that in addition to Pennsylvania Liquefier that you had development costs pre-FID that had to be expensed, that included Puerto Rico?

Yes. I think you're talking about development expense. It's very difficult for me to hear you, I apologize. But yes, we had $16 million of expense during the quarter, $14.5 million of which is related to Pennsylvania and about $1.5 million is related to Puerto Rico. Those are costs that are just not able to be capitalized under accounting rules. So as you make site-related improvements in Pennsylvania, those costs are actually running through the P&L through SG&A for Q3 2019. That's why you see kind of that number higher quarter-over-quarter. As we look into Q4 and into 2020, we do expect SG&A to level out at about $20 million a quarter.

And I got a little longer question about Mexico. If I understand that the La Paz turbine at the Mexican plant, the third one, just increases fuel offtake by mitigating maintenance that would happen on the first 2 turbines and also providing some upside for new PPA commitments. In addition, if I understand correctly, the La Paz turbines are kind of quicker build, portable generation units that maybe have 9,500 heat rates versus more efficient stick built stuff. So I got some questions on this. First, if it's a little easier to construct this modular generation, how does that kind of play into the 1 quarter delay from the second quarter kind of guidance and it all coming online? Also, how long is the duration of the original CFE PPA? How easy is it to market generation capacity on the Peninsula? And I guess I'm looking at Slide 5 that seems to indicate you're expecting a goal of having 50% market share. And why did you go with modular versus perhaps more expensive but more efficient stick built? And finally, are there prospects to economically tap spare Baja, California store LNG terminal capacity for fuel needs on the other side of the Gulf of California?

Yes. So this is Brannen. Let me just -- let me try to answer your question. I'm going to sort of go a little bit in reverse order. So I think the first question, essentially, embedded in your question is kind of why modular? Why simple cycle? How does that kind of relate to your market strategy? I think as Wes has pointed out a number of times, the approach in La Paz is simply speed, lower CapEx. And then as you rightly point out, the heat rate is higher, but you got to remember in the market you're selling in, the prices may be $0.17 to $0.25. So even with our cost of fuel and a simple heat rate, our simple cycle heat rate, you're still the cheapest generator around. But I think more importantly, you're talking about building something within 12 months and to capitalizing on a sort of need for power and a market trend that's immediate. And so what we kind of find in these markets is a solution now is worth a lot more than kind of a solution maybe never. So I think that's the first part of it. The second part of it is, I think generally, as the market strategy that we're seeing in a lot of these locations, this is exactly the solution that people are looking for because the CapEx is roughly half of which you would normally expect. And given kind of our landed price of LNG and the competing price of fuel in these markets, you are, generally speaking, if not the best and most efficient generator, you're certainly within the top 2 or 3. And then I think as it relates to the opportunity for capacity, et cetera, the Mexico market works very similar to other markets. And if there's a need for power, there's also a willingness to pay a lot for capacity. So we expect for this particular asset to be very lucrative in the capacity market itself. And I think, generally speaking, what we expect is blended gas with the power plant there will also give you an opportunity to sell gas to CFE for other potential locations. And so you'll gasify the Peninsula with the only asset that's really around. So in a funny way, the Baja Peninsula looks a lot like Jamaica, looks a lot like Puerto Rico. It's effectively an island. And so the first person that can plant a flag will kind of take all the territory.

Great, thank you.

Thank you. And our next question comes from the line of Spiro Dounis with Credit Suisse.

Good morning everyone. Just a few quick follow-ups. Wes, you mentioned getting to 10 terminals, I think, by the end of next year. I imagine Angola and Ireland are probably part of that assumption. But just curious what makes up the remaining 4. And I realize you probably can't be country-specific, but if you could talk to the region? And then also, what sort of base load demand are we talking about? Is it power, data centers or something else?

I can't really predict where are we specifically. I can tell you, when you look at the map, obviously, the Caribbean, we had a very good [Indiscernible] both in Jamaica and Puerto Rico and in other islands. Actually, we've got a bunch of different initiatives on the smallest [Indiscernible] substantial in that area. West Coast of Mexico, where we are, we feel very good that that's going to prove to be a significant terminal for us. There's other parts of Mexico that are also a strength in a sense, away from the pipeline, and we think it can be significant. Throughout Central America and once we move into South America, both East Coast and West Coast, there's a number of very interesting prospective opportunities. And so I feel like we will definitely end up in South America in some way, shape or form in the next 12 months. And then when you go to Africa, virtually every country that's on the map needs an excess of power and needs gas for the industrial purposes. So it's really not a question of is there a demand? It's a question of how do you translate it? What's the logistical package you bring to bear? I've been in Africa like 5 times this year. I'll be there again in 2 weeks, so 10 days. So obviously, I think that there's a big opportunity there. In Southeast Asia, I was in the country last week where there's 60 million people, and they've got roughly 1,000 megawatts of operational power. So I mean again, big picture, I think Jamaicans use about 1/10 the amount of electricity as people in the United States do. People in Kenya use about 1/10 as much electricity as people in Jamaica do. So it's really hard to explain the opportunity without using kind of superlatives and excessive numbers. But I feel like from our list, I can tell you this. I think there are 7 or 8 countries that we think are the most prime for the solutions that we have and operating the broader space demand potential across these 3 aspects of the business. And I feel like the likelihood that we convert a handful of those is pretty good. And we're not looking to stop at 10 terminals. We're just simply trying to put out a metric that we think is something that's achievable, something that's a focus for us. And we'll go see in the next 14 months how we do. But I think that based on in the current conservations we've got and the engagement we get on this, it should get a little bit easier in places you go because you've got that much more credibility with what we have done. And now that we've worked with Brannen and his team has done on the development side, San Mandela, the small-scale set for us. We have many, many examples of what we're able to do for customers and the benefits to them. And those are the kind of proof-of-concept factors that make a big difference. So.

Got it. Understood. Second one just on the liquefier, if we can go back to that. I believe Chesapeake was your baseload supplier there. And so just with respect to the recent going concern disclosure they provided last week, does that change the strategy at all around the liquefier and maybe how you're thinking about supplying it in the basin?

Not all. I mean they've been a terrific partner for us as we've pursued this development in Pennsylvania. Obviously, we pay attention to their developments financially. It's been a tough market for people who are drilling natural gas. So obviously, we need something from that. But we think there's a lot of [indiscernible] debates if it's the right place geographically and [indiscernible] and we really feel good about a prospect like that.

Got it. Last one if I could, just with respect to the terminal financing. Chris, I think you mentioned wrapping that up, I guess, in the near term. But of course, you're not really hitting that higher run rate until later next year. So I guess just how should we think about your ability to pull on that expected liquidity? Is there going to be some sort of accordion feature in there as the earnings grow? And then just more broadly, I guess, what you would define as the appropriate leverage target for the business in general?

Yes. So I mean the ramp happens very quickly over 2020. So the facility we expect to get done, like I said, in the next 90 days. So hopefully, we'd love to fund it December, January time frame. And the lenders have given us term sheets that we're evaluating now and trying to piece together the best solution for the growth of the business. We do expect to fund the 800 at closing. So it's not like it's an accordion or delayed draw. I think people are believing in the numbers and in the cash flow that we're projecting. And that's going to be the key to building out the future developments.

Got it. And just in terms of the leverage target, where would you kind of put it?

I'm sorry. Say that again?

Just in terms of the long-term leverage target, how do you think about what the right areas for the business?

Yes. So we've talked a little bit about that in the past. I mean we really think modest leverage on these assets once they're operational is appropriate. While they're under development, we want to fund with cash on the balance sheet. But once they're operational, you really do have a lot of opportunities to finance them. We think that our goal or I think our goal is to become an investment-grade company. And that's the plan that we're working toward.

And our next question comes from the line of Jon Chappell with Evercore.

Just two quick ones. Brannen, maybe for you. If we think about 2 buckets of growth being the 1.3 million gallons for the 2 large-scale MOUs but then also the 1.5 million or 1.4 million gallons from the in-discussion terms with, kind of, Jamaica, Puerto Rico and Mexico. None of those, I think, show up in your 2.6 million run rate for the fourth quarter of '20. So realistically, maybe you can address each of those buckets separately? When do you think that those could realistically come online and hit run rate? Is that super early '21? Or is it kind of further into the future?

Yes. So I think, first of all, you're correct that the 2 things you mentioned are not showing up in the numbers we're showing. But I think our expectation is that those items will show up in the second half of next year.

I mean the new terminals, a good [indiscernible] is kind of 12- to 15-month development terminals. So we're doing a lot of pre, do all the work on these 2 particular cases that will be there perhaps in the [indiscernible] of next summer. For our new terminal, we have 12 to 15 months is a good guess, wouldn't you say, Brannen?

Yes.

And for the small-scale stuff, though, from the time of [indiscernible] turn on is probably on average about 5 or 6 months before we get there by ourselves. So I think in terms of volumes for next year, those small-scale customers that we can bring on in the first half of the year, you could see volumes turn into gallons used in the second half of the year. The bigger developments is going to be in 2021.

Okay. That makes sense. So, and then if we just think about kind of the evolution since you became public and the operational prowess, if you will, you're still looking for the same run rate, either operating margins much higher or volume in 4Q '20 as you said 6 months ago in your first quarter earnings call. But it seems that the ramp is very much more back-end loaded I mean in May, I think you were looking for kind of a 1.9 million gallons by the fourth quarter of '19, and now you're only looking for 0.6 million and an operating margin, a 2 01, run rate just 6 months ago by the fourth quarter of '19 and now 36. So can you just speak a little bit about, is that customers not being ready? Is that operational hiccups that were kind of unexpected? What's the reason for the much more back-end loaded guidance range if we look over the next 6 quarters?

It's really just the noise of a month or 2 slippage on construction projects. So these are projects that, for the most part, are very much as we define they're on time, very much on budget and whether that amount of delay that shipped doesn't get there, and it's relatively modest and so we are, frankly, it's not that different than building an office building, an apartment building, an industrial building. We get some slippage in terms of construction stuff, and that, as we actively point out, that's a difference of a quarter or so. But these are assets we expect to be highly productive for decades. And so the movement of a month or 2 while it's material on our reporting periods as we're a public company quarter-to-quarter, in the context of really the utility of these assets and the cash flow generation of them, it's just noise. So.

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back to Alan Andreini for any further remarks.

Thank you all for participating on today's call. If you have any follow-up questions, feel free to reach out to me, Josh Kane or Jake Suski. Our contact information is on our Q3 press release. Finally, we look forward to updating you after Q4. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.