New Fortress Energy Inc. (NFE) Q3 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the NFE's Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Josh Kane, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you. I'd like to welcome you to the New Fortress Energy Third Quarter 2020 Earnings Call. Joining me here today are Wes Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer, and Sam Abdalla, Vice President of Project Development. Throughout the call, we're going to reference the earnings supplement that was posted to the New Fortress Energy website. If you've not already done so, I'd suggest that you download it now. In addition, we'll be discussing some non-GAAP financial measures during the call today. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. 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 review the risk factors contained in our quarterly report filed with the SEC. Now, I'd like to turn the call over to Wes.

Great. Thanks, Josh. Thanks, everyone for calling in early on the 29th here. As Josh said, if you have had a chance to either pop on your screen or download the management presentation that we'll be - we refer to as we go through this, it'd be helpful to have you - have it in front of you. So with that, let's turn to the beginning and start with Page number four. We had a very, very productive quarter. It's our first full quarter as - in our COVID world. We had a number of initiatives when we started the quarter and I'm happy to say that we actually achieved most of what we have set out to do. Starting first and foremost with production. So, as we mentioned in our last earnings call that July 10th was a big date for us. That was the date when both of the turbines turned on down in Puerto Rico. That basically was the moment that we've kind of switched from being a development company to an operating company and I'll go through it in just a second, but the bottom line is that we achieved record volumes, 1.8 million gallons per day for the quarter. Actually had a peak in the month of September at about 2 million gallons and we're well on the way to being the cash flow enterprise that we set out to be. Second of all, the development for us, both our large-scale developments in our terminals and then the smaller developments for our customers also had a very productive quarter. Challenges for sure from the COVID environment and there were some delays, but they're modest and the - we'll have Sam go through them here in just a few minutes, but the tagline is that basically on time and on budget for the most part, very, very good news to report there. New business cycle; we've a lot to talk about and I'll spend some detail on it when we get there, but basically we have become very focused on kind of organizing our business into the organic growth of our existing terminals and new terminals as well as the new markets that we're targeting. We've hired a lot of people. We've actually put a significant amount of focus on the infrastructure build-out there and I think the results are going to show - speak of themselves here shortly. On Hydrogen, I'll talk a fair bit about it. I mean the path becomes clear every day as to what we intend to do. Our first two projects, we announced this - in just recent days. First investment that we made in an electrolysis company, an Israeli company that made a small investment in here a few days ago. Also established a joint venture to run hydrogen, created basically the first hydrogen burning power plant here in the United States to give fuel data for us. So that's great, but there's a lot to talk about there and then Chris can go through the finance and operations, of which there is a lot to - again a lot to report on. So with that, if you flip to the next page, Page number five. July 10th was the date when both the turbines turned on. And for the most part, they have been running very reliably ever since. This is a photo you see there. We're 1.4 million gallons per day in July. In August, we then added one significant customer piece of business with Jamalco, a company in Jamaica, that's a bauxite company. They switched over their boiler operation from HFO to gas, so dirty fuel to clean fuel, that's a big win for the environment. Also was an incremental piece of business for us, and by September, 1.8 million gallons per day kind of running, as we expected. If you look at Page number six, it's a busy page and it's not intended to be the cleanest presentation of this. But you can see, on a daily basis, that modest amounts of variabilities. Our customers' needs go up and down, but the story overall is one of growing and also growing in diversity. And what's very important for our business are both those things. We obviously want higher volumes, but we want more and more customers on our business that's what will create the cash flow profile and the reliability that we want as an enterprise and the quarter was very good in that regard. So flip to the next section, we'll talk about developments. I'll turn over to Sam. Sam?

Thank you, Wes, and good morning, everyone. Our business is about terminals and customers we supply from those terminals. Currently, we have three terminals in operation and two terminals under construction. The two under construction and I'm moving to Slide number nine are largely on track and we achieved significant milestones. Talking about the La Paz, the Mexico terminal, we encountered couple months of delay because the - some of the government offices were closed between March and July due to COVID. The project is on track right now. We have 110 people on site currently. By next month, we will have 150 people on site and the completion of the terminal will be by mid-December of this year and the power plant completion will be by end of Q1 next year. We also realized there is an increasing demand on power in La Paz and on - in Baja in general. So we filed for a new generation license and we achieved - and we got the preliminary approval from the authority. So we went ahead and bought new land and we filed for the permit and we actually received the construction permit for the new land by next - last week. So we'll keep you posted. We don't - we're not sure what will happen with this, but it looks very promising. Moving to Nicaragua, the project is on track for completion by Q1 of next year - end of Q1 next year or early Q2. We signed the port concession in Nicaragua, we bought the land for the power plant, and we finalized the engineering and filed for the permit. This week, we finalized the contract with the - EPC contract with the power plant contractor and they are mobilizing to the site next month. So moving to Slide number 10; our customers, large or small, they need gas and power. For the gas, we supply them from the existing terminals and for the power, we fully finance the solution. We currently, for the small scale or what we call them the organic growth, we have 24 customers in operation and nine under construction. What you'll see in the picture here on Slide number 10. This is a Bimini project 9 megawatts installed, about average of 11,000 gallons per day, and we turned on this project few weeks ago. We are proud of this project, because it's a small island luxury resort and there are a lot of islands in the world. So this is a great proof of concept for what's coming and especially in the Bahamas. We also, this last quarter, we turned on the first two small-scale customers in Puerto Rico, the Coca-Cola facility and the data center for Banco Popular, the largest bank in Puerto Rico. What we also would like to highlight the - out of the nine customers under construction right now, it's our first client - our first small-scale client in Baja, which is the Four Seasons Resort in Los Cabos. Once all these nine customers are online, which we expect by end of the year or early next year, we will have, for total small scale, about 190,000 gallons per day of production. Now moving to Slide number 11, and this is about the ISO Flex. As a quick update on the logistics for the ISO Flex, we hired the former COO of publicly traded Offshore Supply Vessel Company and he brought a very talented team with him. They opened the office in Louisiana. That will be our office to manage this part of the business. The team purchased the OSV, our first small ship, which we call it NFE Zero and identified two barges that we will purchase within couple of weeks. The manifold - our proprietary manifold is also under construction with completion by December of this year.

Right, if you look at - on the following page, there is a cartoon that we showed before which demonstrates kind of how this all works. And bottom line is that we think this is a real game-changer, basically by using ISO containers and filling them up from the big ship and then bringing them to shore and offloading them with just cranes and typical kinds of equipment you'd find in ports already, we basically skip a step of having an intermediate ship. That reduces our CapEx by about 50% and reduces our OpEx by about 50%. It takes the time to deliver from 24 to 36 months down to three to six months. So it's a - it's a huge change across and the first two places where the pilots will be in Nicaragua and in Mexico and you'll see this will transform from a cartoon showing this process to actual performance here in just a few months. So it's a big deal for us. Flipping now briefly to the new business side on Page 14, as I mentioned earlier, we reorganized our sales into two distinct functions; the organic sales groups with our existing terminals and then new terminals and then targeting around the world. We've added more than a dozen new people. The build-out of the origination network for us across the world, we think is a significant step for us forward as an organization and I think - I'm very happy with the people that we have brought in, the organization that we've created. I think the results would speak for themselves here shortly. If you look on Page number 15, just take a quick look at the - what organic growth really means. Here, the five terminals that are under construction are up and running right now. You can see the utilization rate, if you circle there at the bottom of the page, 29%. It means that the 71% of the terminals are still available for new customers. That translates into total capacity of another 8.2 million gallons per day. If you sold all that at our average margins right now, it'd generate another $1 billion in P&L for us. So huge opportunity for us and you're at a huge competitive advantage. We already have the infrastructure built. We already have the logistics in place. We already have the personnel. All we really have to do is just go to our customers, execute with them and get them online. So this is a - it's a big focus for us. It's the best business that we can do. There is lots of things that we think are likely to turn up here in the next months and quarters. But organic growth is clearly one -- it can be one of the real engines of growth for us, cash flow wise, next year. Page 16, the new - the near-term pipeline for our business is actually significant. But what we have done and our reorganization of our - of our origination folks has become very focused on key markets. There are six countries, in particular, around the world that we think have got the characteristics that are the most ideal for our business. Of course, there is - you know, there are several hundred companies in the world and we think that two-thirds of them need our services in one form or the other, but there is a handful, relative handful, they actually have got -- we think the characteristics that will have the biggest impact for us. Those three characteristics are; A, large populations; B, significant existing power infrastructure and in particular existing thermal power that can be converted; and three, significant opportunities for economic growth, especially once the COVID time has passed. So these four circles I show you, there's eight different transactions that we are in the middle of right now. As you can see, there is a real push to the right-hand side. When you look at LNG flows around the world, about 75% or 80% of all LNG goes into Asia. So it's no surprise that when we look at areas that we think we've got the most promise, that's where we are but Central America, South America, Africa, Asia, there is a tremendous amount of opportunities there. Our goal is to be FID on two new projects between now and the end of the year. There is only a couple of months left in the year, but we're down the path on a number of things and I think we've got a good opportunity to bring two of them over the finish line. And then the goal for next year is five to 10 with a real target as a company to be 20 to 30 terminals over the next five years. Turning to hydrogen a little bit and I put a number of slides in here and I'll go through this briefly. But this is a - this is my kind of reset in terms of how we think about the business. Page 18, on the left hand side, here the first thing, to give a little bit of context is, how big is the market for hydrogen today? We all talk about how big we think it can be and what the transition fuel it can be in terms of helping us get off fossil fuels as a world, but how big is it today? A 100 billion kilos of hydrogen are sold every year right now. So, at an average price of about $1.25 a kilo that translates into a hydrogen market today that's a $125 billion. Just to give a little contrast, the LNG market today, which is about 360 million tonnes at about $5 an MMBtu is about $90 billion. So, this will come as a sort of surprise to many people, but the actual hydrogen market today is actually 30% bigger than the LNG market is today. So huge market that exists right now. Where is it all come from? It comes from a couple of different methods, steam-methane reforming and coal gasification in particular. You can see that electrolysis is a very small part of it. All you really need to know about steam-methane reforming, SMR, and coal gasification is it produces hydrogen, but it does so in a very, very dirty fashion. Basically 11 kilos of CO2 created for every kilo of hydrogen with SMR, 22 kilos of CO2 created for every one kilo of hydrogen created by coal gasification. That - what does that means in the world? It means that to produce hydrogen, which is the cleanest of all fuels, it generates 2.5% of all global emissions. So it's a bit of a disaster from an environmental standpoint, that's the bad news. The good news is there's lots you can do about that. If you look at Page number 19, just again to give a little bit of context, the hydrogen that we are looking at in our projects can come from three basic feedstocks, one, water, obviously, largely free. It's not exactly free, but we put it as free because that's essentially what it is. It can come from gas or it can come from coal. Those both have chemical compositions that are actually able to create a lot of hydrogen if they're broken up properly. The production technologies, we've looked at over a 150 companies. So we've seen a lot of different production technologies - really three different types here. electrolysis, which is the process to take water and split it into oxygen and hydrogen, Methane pyrolysis; and coal pyrolysis. All you really need to know is that these are processes that use significant amounts of heat and although they are similar to the technology that are used right now, the significant difference is they can be made entirely clean, we believe, and I'll talk about that in a second. So the best price at the bottom here. I draw lines under just - and just for reference. And what this really represents is our view of, if everything worked perfectly in the world, which of course it doesn't, what is the theoretical price at which you could create hydrogen; water, $0.80 a kilogram, that's basically $0.02 continual power a 100% efficiency of your electrolyzer, gas, through methane pyrolysis, $0.60 a kilogram; coal, $0.20 a kilogram. That's the one to actually draw a line under because there is a little bit to talk about there. Look at Page number 20, when we tried to dimension the problems and what we're trying to address, what's our focus? Well, three sectors; power, industrial and transportation combined to about 80% of all emissions. So, in very simple terms, it wouldn't be perfect, but if you could actually turn those three sectors from burning dirty fossil fuels to running clean hydrogen, you'd go long ways towards cleaning up the CO2 in the atmosphere for us. So, on the right-hand side, I put a box together that just shows you, in dimensions, what the relative competition is of fossil fuels versus hydrogen today. So, as I said, if we're able to generate hydrogen at $1 a kilogram, right, to convert that into an MMBtu equivalent, just multiply by 7.5. Well, power today, look at power in the United States, Henry Hub, which is the index at which natural gas is sold is about $3. Say it cost them $0.75 in transport cost to get that natural gas into their power plant, $3.75. So what that means to me when I look at this is that, even in our kind of "best-case scenario" using kind of conventional electrolyzers, we're still about 50% higher in price with hydrogen than we are with natural gas. Industrial, as I said in that earlier page, the average price that is paid for the industrial hydrogen that's created is about $1.25. $1.25 times 7.5 is about $9.5. So the dollar versus - the $7.50 for hydrogen versus $9.50 could be competitive, again in the best case. Transportation, there's a big gap there. I put an asterisk next to it because that is before the cost of logistics, which is a big deal, right? So in order to get basically hydrogen to people in service stations or in gas stations or in trucking stations or whatever around, there is a significant cost to that. And so, while you look at these two, you'd say on paper, day one, the electrolyzer could have the biggest impact potentially on transportation. The other two is actually simply not good enough. The goal then is actually very simple, either you have to find a way to make hydrogen at roughly 50% lower than what we think is the best case or the governments have to step in and do one or two things. They have to either subsidize the production cost of hydrogen bringing it down, so it's more in line competitively or they have to put a tax in place on people that are burning dirty fuels. When they carbon tax, what I really mean is, make it more expensive for people to burn those dirty fuels, so that our fuel is more cost-competitive. And those are both things, I think, the government could and should consider. But without that, if you want to just take care of it yourself, then you need to actually produce it cheaper. So Page 21, the goal is actually very simple. It's zero emissions and something that's become very clear to me is, I think the way that we characterize hydrogen and its production, in my opinion, is not really correct. We say that electrolysis is clean, "if the power comes from renewable source." In other words, it's the -- as I say, it's the Hippocratic Oath of hydrogen, first do no harm. Instead if you're not creating emissions, then therefore it's clean and so we call that green, but the characterizations are little confusing, at least to me. There is green and there's blue and there's grey and there's even turquoise and I think that has less - is less important to categorize it that way than in a much more simple way, which is no emissions. And when we look back at that earlier chart, you see that, you water and gas and coal. And coal in its pyrolysis - this coal pyrolysis could be to generate hydrogen as cheap as $0.20 a kilogram, which again would be less than the $0.50 threshold that you need to really go turn on the power. If you can sequester the CO2 that comes out of that, not like spit it into the atmosphere, it then becomes very, very clean power. There's a number of articles have been written around this. So if you actually go in, there's a Forbes article that I actually read just last night about coal pyrolysis and things that have been done around the world. I think you're going to hear an awful lot about this and as odd as it may seem that the dirtiest of the fossil fuel is may be real gateway to creating really, really clean hydrogen for us. I think it's got a lot of promise, simply because if the governments don't intervene and make it more expensive to run on fossil fuels, and the market has to go produce it, this is the place where it's going to end up going. So last thing, page 22, what do we do this quarter? We did two things, Long Ridge, which is the photo there. This is a -- it was an abandoned smelter site, aluminum smelter site that the infrastructure found -- another kind of a sister company had taken over, really an interesting asset, they're building a 485 megawatt power plant there. We are partnering with them to bring in and burn at least part of the feedstock to be hydrogen with the goal for it to all be hydrogen at the end of the day. Really, my goal in this is presuming success. In other words, presuming that we can find a clean way and a cheap way to create hydrogen, what does the field data actually support? So we know what GE tells us they think it will do and we trust them, of course, but we want to go see and verify that ourselves. This will be a real opportunity as this gets up and running next year to run hydrogen through it, see the field data and see how it actually performs in practice. So that's going to be a big experiment for us and something that could be very productive. Then on the right-hand side of the page, this is the company that we invested in called H2OPro or H2Pro. It's an Israeli-based electrolyzer. It basically is a much more efficient way of electrolysis. In simple terms, it has got two different cycles that it runs through and it uses the heat that has created from the first cycle to make the second cycle more efficient. So it's kind of a combined cycle as I'd like to think of it, in lay terms, as electrolyzer. The bottom line is that it uses 30% less electricity, less than 50% of the CapEx of the traditional electrolysis and it achieves efficiencies close to a 100%. So on paper and the laboratory, this actually looks like a very promising technology. We made a small investment and we're going to partner with these guys to basically build a prototype, so we can get actually the field data for it. But again, this is something we think is an exciting next step for us. Just flipping to the next section on COVID, I'm going to turn it over to Chris to talk about this in a second, but we posted this on our web page. This is page 24. Posed this on our webpage. And I just want to give a little bit of an update in terms of what we have done as a company, because essentially, at least from my perspective, I've been sheltering from work since the 11th of March. So we've been here every day, and we actually, our company has been coming to work since the 1st of June. Once COVID happened, again, my point of departure was when Adam Silver like suspended the NBA season on March 11th, a few folks came on March 12th. There was a handful that were around at 13th, then it was a new world. At the end of the day, our office here in New York, on the following Monday, there were 12 people and my dog. So that's we were socially distanced, because this is a large office and there's very few people here. As the months passed, we had more and more people that wanted to come to work. And so basically, we set out to create environment for them that; number one, was as safe as possible environment they could be in and they could feel comfortable coming to work; and number two, allow us to put in place the testing biometrics and other protocols to ensure that we're giving our employees the best chance of being here and safe; and then also, we did a number of things with our folks in the field because as I said at the beginning, we're an essential enterprise, our customers rely on us to -- for the power and the gas to run their businesses. And so, of all the things that we did here, and I'll have Chris talk about the one that I'm most proud of is that in the months of May and June, which were kind of the peak months in terms of uncertainty of not knowing what's going to go on, what's going to happen with this, we reached out into all of our field personnel. We paid them basically a bonus of 150% of their salary for those two months to -- just as an acknowledgment that what they were doing was important to us, important to their customers and we want to do the right thing. So, all these actions at the end of the day total up to about $1 million in cost, so it's not free to do this, but the results on them have been really terrific so far. Chris?

Yeah, thanks, Wes. Good morning, everybody. Appreciate the time to update you on the results for Q3, but first to talk about COVID. As Wes said, we made a carefully considered decision to return to work, and I'm happy to share a few details. As an essential industry, our responsibility to keep the lights on for our customers drove us to find a comprehensive safety plan to return to the office. And as Wes said, we are so proud of our team for their response to support our customers in the wake of the pandemic. As Wes said, the Company provided bonuses for the essential workers staying on site at our power plants and our gasification terminals. Additionally, we created our own version of the NBA bubble at the corporate offices. We instituted daily questionnaires and no-touch thermal temperature checks. We increased the frequency of cleaning the office including COVID deep cleans on a bi-weekly schedule and we've taken on a new floor to double our office space and maintain social distancing. Most importantly, we've required mandatory weekly testing for the whole Company and we've administered over 3,200 tests in the last six months. This has resulted in a safe and productive work environment with knock on wood, no in-office transmission. Excited to announce, we've hired over 60 people, we've completed eight construction projects, signed eight new contracts or MOUs representing over 2.5 million gallons per day, all while selling record volumes for the quarter. Our successes during the pandemic are owed to great customers, dependable vendors and dedicated employees who have been extraordinarily committed during these challenging times. If you turn to Slide number 26, I will quickly walk you through the summary financial information for the quarter. The biggest driver of our results, as you know, and as you've already heard are volumes. We average over 1.5 million gallons per day for the quarter, and as Wes said, we sold an average of 1.8 million gallons for the month of September. The increase in volumes is almost entirely driven by increases in Puerto Rico and gas sales to the Jamalco refinery boilers. Revenue for the quarter increased $42 million, which is a 45% increase over Q2. And despite the large increase in volumes, the cost of sales is mostly unchanged due to the decrease in the cost of LNG to a little more than $4 for the quarter. We are pleased to report that our non-development cash SG&A expense for the quarter was $19 million, which is just underneath the $20 million we are forecasting and on track for $80 million for the year. One thing to call out is we had $24 million loss resulting from the write-off of debt issuance costs associated with the early termination of the credit facility. And lastly, while I'll touch on the balance sheet in greater detail shortly, we have over $150 million in cash on hand which when combined from cash from operations will fully fund the remaining cost to build out in Mexico and Nicaragua. If you flip to Slide 27, you can see the volume ramp and cash flow estimates for the remainder of 2020 and 2021. This familiar graph shows the committed volumes only to the growth -- excuse me, shows committed volumes only and given the growth opportunities both organic through new customers through existing infrastructure and inorganic through new terminals, there's significant upside. In Q3, we averaged 1.5 million gallons per day for the quarter and expecting around 1.8 million gallons for Q4 on our way to 3.5 million gallons once Mexico and Nicaragua terminals commence. When you look at the consumption for the quarter and break down large scale terminals versus the direct sales to customers, volumes were right where we forecasted to our baseload consumers. Finally, moving on to Page 28 on our Q2 earnings call, we laid out a roadmap for our capital plan, we've executed on those key priorities. In August, we priced an upsized $1 billion of secured notes offering due 2025 at 6.75% and refinanced our existing corporate facility and the Jamaican subsidiary bonds. This transaction pushed out our debt maturity 2.5 years and it will lead to $23 million of interest reduction for 2021. The notes have traded exceptionally well post the offering currently at $106 million to yield about 5%. The bond offering deepens NFE's capital market access to fund growth and is a critical step in NFP's transition into a well capitalized and mature Company. Following our refinancing, we instituted a quarterly $0.10 per share dividend, which represents 20% to 25% of the next 12 months of free cash flow. The robust cash flow generation of our business allows us to return capital to our shareholders and we intend to stick to the 20% to 25% of free cash flow target range on an ongoing basis. Three, we remain fully funded on our committed projects and are committed to maintaining modest leverage and strong liquidity. Our goal is to become an investment grade Company and we will fund new terminals via a prudent mix of debt, equity and cash flow generation. With that, I turn the call back over to Wes -- to questions.

Great. Operator, we will open up to questions.

Thank you. [Operator Instructions]. Our first question comes from Sean Morgan with Evercore ISI. Your line is now open.

So, one thing I've been wondering about with OPEC kind of looking at easy production and Libya possibly coming back online, there's a question that maybe -- there may be some easing in the price of crude, and I think that kind of might have an impact on sort of the diesel competitive cost and the high sulfur fuel oil kind of moving lower. Is there any risk that if that spread compresses that some of your existing customers in Puerto Rico and Jamaica, do they have the ability to switch power sources and essentially use diesel instead of natural gas from - that they are acquiring from you? Or are they pretty much fixed into what power source they're kind of generating from?

Well, generally the answer is that they are committed. I mean, we have a range of contracts, they range from merchant contracts to long-term committed contracts. The bulk of our contracts are long-term take or pay. The average term of our contracts is roughly 12 years. So, for the most part, they are, but there are some that have the optionality to switch back and forth. One thing I'll say is, we had done this study for one of our investors this summer. We look back at the previous ten years of data, looking at the delivered price of diesel versus the delivered price of gas in their country, it was an island country. And over that ten years, there were 24 days that diesel was cheaper. So, out of 3,650 days roughly, there were 24, so less than 1% of the days was it actually cheaper. Of course, we had long-term, very, very low prices, as you had a little bit of a dip this spring that could -- that could definitely impact that. But I think that from a cost competitive standpoint, the last 10 years or any guide, over 99% of the time we are cost competitive. In addition to that, as long as you are around that there is a lot of other hidden cost of running liquid fuels on the maintenance side and the operational side in particular. Turbines don't like running on diesel. And so, the marginal cost of maintenance and marginal cost of taking care of the equipment, the O&M costs are a little bit higher and people definitely care about the environment. I think one of the real misconceptions people have is that, somehow if you're a developing country and you're trying to get your energy situation under control, you don't care as much about the environment as people in developed countries. And from my perspective that's just flat out, not the way that it is. So, I think if you're -- if there was anything close to parity, you would - of course would switch, but again historically it's been -- it's been much to the favor of gas over that period of time.

Okay, And then just another [Technical Difficulty]

Sorry.

Sean, I think we lost you.

[Technical Difficulty] I'm curious if you have at all any clarity that you can disclose in terms of what you've re-contracted and what your kind of gas price is starting to shape up for 2021 and how much of that is hedged, and how much of that's kind of spot exposure?

We haven't -- we haven't done anything material that's reportable on the hedging side. Yeah, there's a lot that is in the works right now. We still have significant open position next year. I'd say my commentary over the quarter is that the impact of the -- all the hurricanes that hit the Gulf Coast and shut downs there, there is a fire of -- at one of the producers in Norway, there is just a handful of events that happened. And so, you took out a fair amount of supply. And with that, prices rose a bit over the course of the -- of the quarter. But our position is still in long-term, very, very much in the money. There has been very, very little impact, when you look at it quarter-over-quarter of the value of the long-term position and there is some short-term volatility and you'd expect to get that. I think most people in the market would believe that there is going to be some volatility over the next couple of years, as you get the short term swings in supply and demand, but you have a significant amount of production, which is expected to come on in 2024 and 2025 that will lead to a very oversupplied market and that allows us to have a lot of flexibility in terms of the kinds of contracts that we could get. So, we don't have anything specifically to disclose. We feel really good about this right now. I mean, in Q3, we bought gas sub $3, Q4 will probably be in context wise around $4, even though the market is $5 plus today. So, we're in a good position here for the fourth quarter and feel very good about the aggregate position going forward. But as I mentioned before, this is something that is a focus point for me personally and for the firm. And I think we'll have some good developments to talk about here in the not so distant future, so.

Okay. Thanks, Wes.

Yeah.

Thank you. And our next question comes from Devin McDermott with Morgan Stanley. Your line is now open.

Good morning. Thanks for taking the question. So, the first one I wanted to ask on is hydrogen and I appreciate the additional time and detail you provided on this call. And also congrats on the significant steps you're taking just over the past few months in advancing the zero ambition that you all have. I wanted to talk about the specific next steps here as we think about really the next few years and executing on this strategy and I think you all talked about doing some pilot projects with the H2Pro investment. I was wondering if you could comment on kind of what you're seeing there in terms of what those projects might look like? Any comments on customer demand for green hydrogen as well? And then should we think about additional tech investments to count, for example, you talked about the gas and coal pyrolysis, is that something where you could make some seed investments as well. I really was kind of framing up the next few years in terms of the opportunity set and capital allocation around this opportunity.

Yeah, well, there are two answers to that. One is, with respect to the prototypes, really we're trying to identify technologies we think have promise, make an investment in the company and then become a partner to build the prototype to get field data to support what the theoretical data is in the lab. So that's the general thesis that we have. H2Pro, we think is very a capable group, we like their technology. So, we want to see that out and in the field, build the prototype with them and get that deployed. And so that's the one specific thing. What I -- when I laid out the numbers on water, gas and coal, I did so because my view about this, my intention of this is to try to find a technology, trying to find a process, trying to find a way to really deal with the climate change issues in a very, very broad way and you need to have scale to do so. And the one page that laid out, Devin, which show kind of theoretical best price of $0.80 and $0.60 and $0.20. Those are really theoretical best prices today and of course things could change, but that's if everything works out perfectly. And I'd lay that out because simply if you then add on a capital cost, then you ended up at $1 for example on electrolysis that's still roughly twice as expensive as what people can burn natural gas in their power plants here in the U.S. today. So that is not going to actually solve the problem unless either the government makes it more expensive for people to burn fossil fuels or they give you some production credit. So, then when you go to the right hand side of the page, you look at the other things that are possible, the coal really does leap off the page. It is a very counterintuitive thing. So for the ESG folks that are trying to invest sustainably, they hear coal, I'm sure it makes their eyes roll a little bit, but that's why I say it's not about -- in my view, it's not about the characterization of kind of green or blue or turquoise or grey; it's really, can you produce hydrogen and do so in a way that create zero net emissions. If you can, that's very clean. And what we have seen has been some pretty promising technologies that would indicate that it is possible to basically create hydrogen very, very inexpensively this way. And then the stream of CO2 is very pure. And CO2 itself, then it becomes a question of what can you do with the CO2, it's got an industrial use. It can also be used for power generation. It can be used to sequester it underground. These is a whole bunch of different sequestration technologies. And so to me, the key to this thing is, if you can figure out a way to sequester economically, that unlocks a huge new store value. I mean, I joke about with my guys here, my great state of Montana has massive coal reserves. You can end up with Montana and Wyoming being mini Saudi Arabia of hydrogen production and I know that sounds fanciful, but go on to the Internet, start looking at these different articles and things that are out there, and you'll see this is a very serious enterprise that people are looking hard out. And it may not be ultimately the best like long-term solution, but it may be a great immediate solutions. So I believe there will be trillions of dollars made literally in the-- in this transfer of -- from a fossil based system to a hydrogen system. And I think that the people that can identify the right technologies and the right feedstock and then industrialize that are going to do very well. And you know so doing well by doing good is something that I'm very, very focused on. We're very focused on. We've got a great team of people that are working on this stuff. And so, I think we will make a follow on investment, my guess is in some of these other sectors much sooner than later. And I am very impatient about it. But I think that you have to get the cost of it down kind of $0.50 or less. At $0.50 or less, everything changes, right. $0.50 or less and you really -- you can do it with clean, emission-free production, you will see a massive transference over. And so, it's very clear to me now what the path is and I think the electrolysis is got a lot of like -- a lot of promise in particular in transportation, where you could imagine distributing electrolyzers all over the place and maybe you're making your own fuel effectively, where are you using it and that's how you cut down on a lot of your logistics and transportation costs and what not. There is a number of different paths, but the big one that would be a game changer is figure out a way to really create a long-term emission free hydrogen at $0.50 or less. That then puts you right into the strike zone of all these different technologies. I said the three, it is transportation, it is power and it's industrial use. Solve that and you've done a really good job just kind of cleaning things up. So, sorry for the long answer to a short question.

No. That's great and really helpful context. And my second question and I'm going to switch here a bit to the growth opportunities you have with the many existing portfolio. And I think the additional detail and disclosure on the small-scale opportunity and the execution you've had there is really good to see. You highlighted the $1.2 billion of P&L opportunity from increasing the utilization on existing terminals. And I guess the question I have is; one, any logistics constraints that would prevent you from going to theoretical 100% utilization as you highlighted in that slide that we should be thinking about? And then secondly, I think on the slide, it talks about 50,000 gallons per day from the nine customers you've executed on so far. And in the remarks, you also talked about a 190,000 of small-scale within the portfolio. So just kind of bridging those two numbers and thinking how -- what's likely to come here over the next 12 to 18 months?

Yeah, I mean the answer to the first question, there is no constraints at all. As I have often said in the infrastructure business, if you -- it's actually very simple. If you create infrastructure for one purpose and you don't use it, you lose all your money; if you create it for one purpose and you use it, you could earn a decent return; if you create it for one purpose and use it for two or three or four, that's how you make outsized returns in the business. And so, this is just simply like an attempt to do the latter, which is basically take the infrastructure, the logistics, the people, personnel that we have in place and go aggressively into those markets because we have a massive competitive advantage. And so our renewed focus on that, and Sam touched on it a little bit, we've got milestones, we've got our first couple of customers turned on in Puerto Rico. We've got our first contract signed in Mexico. We think that there are many, many of those to follow, and that is really low hanging fruit. And so, it's got a real focus for us in those markets. We think there's significant incremental demand. As you can tell from that table, we've got significant operational flexibility to service them. So that's a -- that's a really big focus for us. And then the beauty of it is obviously because there is no lag time in the logistics and the infrastructure, those are the kinds of things that could translate into earnings and sales for us in the very near term. And that's really the focus.

Thank you. Our next question comes from Joseph Osha with JMP Securities. Your line is now open.

I wanted to return a little bit to this issue of hydrogen in the transportation market, because the price points there that that market will bear are potentially higher, in particular if you look at running hydrogen and fuel cell. So I'm wondering if you look at what might be economically viable there doing electrolysis on the side, as you talked about Wes and whether that might work at say a $1.50 kilogram or something?

Yeah. No it's -- it is really interesting because the process that we've been going through with this is basically twofold. One is, how do you create hydrogen at the lowest possible price, which is a big focus? And then two is, if you had inexpensive hydrogen, what would you do with it? And it's very, very similar to what we looked at when we built this business as our core business, because we knew that once we sell for the logistics and the infrastructure to bring LNG, the questions like, what were the customers that would be most obviously you'd go to? Our answer for that obviously was to go to power because power generation is in a single place. So it's kind of simpler logistics and the needs that they have are daily and they are significant, so that became the answer. We also have some transportation customers, right. So at one point, we owned -- in a different company here, we owned the biggest LNG trucking fleet in America. We have supplied the bus system in Jamaica with natural gas. So there is number -- if you look at the development of natural gas as a transportation fuel, what you see is that it developed around places where logistics became actually fairly straightforward, so the kind of return to base users, so garbage trucks, municipal bus systems, UPS trucks, FedEx trucks, they all come back to the same thing to refuel because that's why I -- when I show that the fuel price there you're 100% right. You look at it and say Gosh, $15 in MMBtu. We can make it a lot cheaper than that, that's great. There is an asterisk next to it because we have to get it there. And so, hydrogen trucks or hydrogen cars, all those kinds of things are big theoretical customers, but there is a significant infrastructure build out that has to go along with it. I think one of the -- one of the geniuses effectively of electric vehicles is that you don't need to have all that infrastructure in the same way because everyone's got an outlet in their garage that they can plug their cars into. And so in effect, a lot of the infrastructure already exists because you have electricity in your house, but you can see that even though with electric vehicles, there has been a pretty slow build out for the infrastructure and support these like charging stations around and there's a lot of analogues you can draw between the two of those. Now, one thing I'd say about this and I think it's a miracle that more people want to talk about it, people say about electric cars and it it's -- it is really clean emission free and that's great. But where does the electricity come from is a fair question. And so if you're in a state where 50% of your energy comes from coal, you're basically running your car on coal, and that may be a very popular thing for the electric vehicle guys to think about, but it's the truth. And so, really I think that the transportation stuff, my view, again if you look at the places have got the simplest logistics long term to sort out that'd be ships because they come just to the same places and they use a lot of fuel. Airplanes because they come to the same places. I think actually one of the big opportunities honestly will be railroads. We have worked with the Siemens guys, they think that they're going to have a very, very effective form of a prototype for hydrogen powered locomotive like a booster on this thing. Again logistics for railroads are a lot easier because they on the tracks. So, we know where they go. So, it's a much easier thing to solve for us. So I'd say in terms of degree of difficulty, cars, trucks long haul trucking, that's the most complicated because of all the infrastructure build out, but things like municipal buses, things like garbage trucks, things, the return to base users as well as things like railroads are probably on that list. You can probably see a fair amount of development around that. And I think that electrolysis, even if it's not as cheap as maybe some of these other things we're talking about, it is cheap enough to be really effective on that and if you distribute these electrolyzers around, then you don't have to build the infrastructure to then transport the stuff, which is another incremental cost that you kind of skip, so.

Yeah, for sure. Can I ask a follow-up? Actually it's not a follow up, it's a completely different question. I'm wondering if you're starting to see from some of your new markets, any demand related to using gas as a firming resource alongside renewables?

Well, you know, I think that the energy plans that I see over and over in these countries are some combination of gas-fired power and renewables. I mean renewables are awesome, right. They're are clean. They have gotten much, much cheaper, much more cost competitive. The negative obviously, they're not dispatchable. So here in New York City, I'm looking at the window today, it's pretty rainy and misty, solar resources wouldn't be working very well right now. So, you need something else to kind of go alongside of it. And what I -- this is what really kind of got me very focused on the whole hydrogen thing is that, if you have hydrogen, that is effectively the battery that you need to like support you on days like today. And so - and allow for a much, much higher percentage of renewables in your system because you know then you've got a very active battery to do it and your choice is hydrogen as a battery or batteries as batteries. And right now, the differences are not even close. And I think -- and also, you also have to think about it like I'm trying to be very, very intellectually honest about looking at the process of creating the hydrogen and looking at it, how we create, how clean it is and etc. We should apply that same rigor to creating batteries, right? So, if you are going to actually make a battery, there's a whole bunch of stuff that goes into it and we should just think about that production process and line it up side by side and see which one is really cleaner, as well as cheaper and I think our analysis, our conclusion obviously is that hydrogen actually, if you can do it properly is very, very competitive and very, very clean. But there is no doubt that gas I think is going to play a big role. We see not only gas in terms of the new power plants, but then again, replacing existing thermal power and my first big discussion two nights ago with one of the Asian customers that is deadly serious about converting out of a big coal fired business -- operation into natural gas. So, these prices are pretty competitive, but environmentally on top of that, it's a big, big plus. So, there is no doubt that gas is a big part of the energy infrastructure of -- for the developing worlds, so.

Thank you.

Thank you. Our next question comes from Christine Cho with Barclays. Your line is now open.

Well, you guys have worked hard to get to a position of being free cash flow positive in your base business and that has maybe distinguished yourself a bit from some other clean type companies, clean energy. So this might be a bit of a longer-dated question, but just curious how you think about maintaining a positive free cash flow position given the magnitude of opportunities that you've alluded to? And maybe as a follow on, a couple of quarters ago, you referenced that a potential equity issuance and it sounds like most of these investments are modest in size, so probably not applicable in near-term, but depending on the scale of investment, could we see those come to market in conjunction with one of these investments and that's how you kind of increased the flow of the stuff?

Yeah, it's a -- that's a really, really good question, Christine. I think that, look, we're very, very focused on free cash flow. And while it's great to talk about all the upside, the potential in the hydrogen stuff and that's obviously a real passion around here, the business is made every day with free cash flow that's generated from our operations and they are significant, they are consistent as you can see from our presentation of them, and most importantly they're growing. So, I really believe that when the two terminals are completed and we bring another couple of projects to FID by the second half of next year, we could double our free cash flow estimates, where we are right now to match the dimensions of the transactions. When I say that, I'm very focused on a handful of countries, it's countries that we think not necessarily going to have a 1,000 megawatts or 2,000 megawatts or 3,00 megawatt projects, the ones where we can do incrementally the same kind of things we've done before, 300 megawatts, 400 megawatts, 500 megawatts in projects and then do that over and over, because the economies are big and growing. And I'm deadly serious about being a Company that generates billions of dollars in free cash flow on a very consistent and straightforward manner and doing so faster than not. That's what the whole focus on the logistics chain, the ISO flex, the ability to get to these markets quickly is something that we are laser focused on. That plus the organic growth. So the cash flow generation is something that we're very focused on. And you're right, most of the investments we have looked at in terms of incremental things have been modest in size, but the capital required for a situation like Nicaragua is roughly $250 million to $300 million for a 300-megawatt plant plus all the related infrastructure. That's a good placeholder for the size of investments, which I think you will see. And so, obviously if we do two or three or four or five of those, you can do the arithmetic and look at what our capital needs would be. We have not issued any equity since the IPO and we haven't had the need to do so. Chris has been very clear and we have a clear policy in terms of growing the Company, but doing so with really debt and equity hand in hand because we want to maintain the credit profile that we have and improve on it as we get more diversification and we get more cash flow. But I think that more capital events are to come, assuming that we are successful in our pursuit of new business and relentless is the word heavily used and I'm so focused on the next customers. And there is so much to do in these different markets and we just have to put the people on the field that have the capability of doing so, and we have done that. Like I said, there are a dozen new people in this. At the end of the year, our forecast is we'll have roughly 50 people in the origination business around the world in these different markets and so you add that all up, that's the infrastructure that can generate the flow of new opportunities. And then we've got the development teams, the operations team to then execute on that. That's what the -- that's the core business of the profile is. So, there is a lot more to come, but I feel, even in a time of COVID where it's a challenge frankly to get in front of people and you are meeting people on Zoom calls rather than in person that this too shall pass, and we've made a lot of progress over then, knock wood I think we'll have some exciting things to announce hopefully soon because I feel good about the number of the things that are out there, but I can't forecast that until they actually get done. But our goal, as I said, two new material projects done by the end of the year and five to 10 next year, those are lofty ambitions. But I think they are -- the foundation for them is actually set with the infrastructure we're putting in place. So.

Well, that was really helpful. Thanks. And then just separately, is there any update you can provide us with the FERC proceedings around the Puerto Rico terminal?

There is no update. We sent a response letter, it's all public. Everything is out there, as you can see their letter, you can see back our response, we feel 100% good about our position, and but we haven't heard back from them. So, we asked for them to respond expeditiously, they didn't. So I don't control that, but now we feel very good about our position. So...

So okay, thank you.

Thank you. And our last question for today - one moment. Our next question for today, and our last question for today comes from Ryan Levine with Citi. Your line is now open.

Thank you. What do you anticipate is the most efficient way to transport hydrogen to some of the new purchases current end markets and would you have any intention in pursuing the infrastructure to help facilitate that?

It's a great question, Ryan. The hydrogen can be frozen, it's a smaller, lighter atom, so it takes a little bit more energy. I think it could freeze at about 100 degrees colder than does LNG. So that part of the infrastructure works. There seems to be some challenges in putting it into pipelines, right. So, we talked to the technical people, I guess the atom is so small, there is some permeability issues and whatnot. So, it's a real issue. One of the things I think is really interesting about the production of it though potentially is electrolysis if that was your feedstock for hydrogen, you could perform that onsite, potentially. So actually obviate the need for transportation, that's one significant benefit other than something to really think about. Also again depending on the feedstock, that's why I layout that feedstock page, you could use the feedstock, transport that and then have your hydrogen production on site. So, I think what's likely is you'll see distributed production is kind of the way we think about it like fill hydrogen in a box effectively, where we've got different production technologies that then travel to where they are used. That's why I'm so focused on price because when you look at the big users for the ones that leap off the page, the industrial users and the power plants and you could potentially actually create your own hydrogen on those sites. That's in effect of what's being done today, it's been done in a super-duper like dirty way. And I think it's amazing, I put those numbers there, maybe they didn't surprise you, they surprised me. I was shocked to see that actually hydrogen has a bigger market than is LNG today. The users for it are basically the refineries, right. The refineries use a lot of it for industrial purposes and of course it's used a lot in the production of fertilizers. So, for things like methanol and for urea and ammonia, in particular. One of the other things, people have talked about is, it's fairly easy to turn hydrogen into ammonia and then ship ammonia, that's done commonly, it's actually shipped all over the place. And then you can either use it as ammonia when it gets there in some way, shape or form or you have a fairly simple cracker in place and actually split it back out. So -- but your question is like spot on, a great question. It will be first, find a cheap way to make it, second, find a use for it and third, trying to figure out how to get it from point A to point B, that's actually - that is the logic chain to get from one place to the other. And we're still on one, making progress on one. Once we get to one, two is in gunsight, three will be a big part of the solution for it though, so planning for some good options.

Thank you. And I'm showing no further questions in the queue at this time, I'd like to turn the call back to the speakers for any closing remarks.

Great. Well, thanks everyone for calling in. Obviously, we're happy to follow up on any follow-up questions through Josh or anybody else in Investor Relations Group and we look forward to talking to you after our next quarter in the New Year. Thank you.

Ladies and gentlemen, thank you for the participation on today’s conference. This does conclude your program. And you may all disconnect.