Good day, and thank you for standing by. Welcome to the New Fortress Energy Second Quarter 2021 Earnings 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 is being recorded. [Operator Instructions]. I would now like to hand the conference over to your speaker today Josh Kane. Please go ahead.

Thank you. I would like to welcome you to the New Fortress Energy Second Quarter 2021 Earnings Call. Joining me here today are Wes Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer; and Andrew Dete, Managing Director, leading our Brazil efforts. Throughout the call, we are going to reference the earnings supplement that was posted to the New Energy website, 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 very much, Josh and welcome everyone. As always, we'll refer to the investor presentation, which we posted to the website, as Josh said. But before we get into that, we will make just a couple of thoughts. It's been an extraordinary quarter for us and a remarkable six months thus far this year. Our company is in the energy transition business. No surprise, the world needs to decarbonize and do so quickly and our business is to do so, while addressing both energy poverty and energy inequality while also making significant returns for shareholders as we do so. My goal is to be the world's leading company in the energy transition space, and we're making pretty good progress on it thus far this year. What we have today, just to level set, is the constellation of terminals and operations in countries around the world. Jamaica, Puerto Rico, Mexico, Nicaragua, Brazil, Ireland, Sri Lanka. It's a geography test that spans the world that has established all these assets and terminals. And now that we've made the investments and done much of the hard work, I expect that each of these markets will show incremental and substantial organic growth from this point forward. We should expect to see, one, more power plants switching to gas in places like Puerto Rico and Mexico; two, new power plants being built in places like Brazil; three, soon, you'll see bunkering as a -- using LNG as a marine fuel in places like Jamaica as a hub. We've already paid for the operations, we've already paid for the infrastructure, we have a massive competitive advantage that is both money and time, and I believe we're going to show now tremendous organic growth across the portfolio in the months to come. Second of all, earlier…

Thanks, Wes. Hey, everyone. Great to talk with you again and excited to share more on our business in Brazil with you. So two goals we have today to communicate about Brazil. First is to share a bit more information on our views, kind of on our macro thesis in Brazil and now some of the current events playing out in Brazil around power and gas shortages really accelerating the opportunity for us. And then two is to talk about kind of how that situation translates to commercial momentum for us. And to give you some information on where we are commercially in Brazil, and how good we feel about the next steps. So starting on Page 18, we wanted to kind of simplify and distill a message about what's happening in Brazil today on the power side and on the gas side. So kind of going left to right on this page, what we have in Brazil today are hydro shortages leading to power shortages. So the electric get in Brazil is basically underpinned by hydro. However, you measure it, it's about 65% to 75% hydro power. There's about 2 -- over 200 hydro power stations in the country. However, what we've seen kind of in a sustained downward trend over the last seven years is hydrological shortages. So lower rainfall and lower water flow in the dams. And this year, in 2021, we're seeing real acute hydro shortages leading to power shortages throughout the country. What that does in Brazil is that means you have to compensate with thermal dispatchable power. And so basically, all the natural gas power plants and frankly, some of the oil and distillate fuel power plants turn on at that point. And you ship basically all the domestic gas production to power and…

Thanks, Andrew and good morning, everybody. A couple of opening points that are important to mention. I'll ask you to turn to Page number 24 in the presentation. With the Hygo and the GMLP transactions closing on April 15th, this is the first quarter where our consolidated financial statements reflect the performance of those newly acquired assets and subsidiaries. So considering this, I wanted to take a quick minute and tell you about the changes and where the cash flows show up throughout the financials, the footnotes and the MD&A included in the 10-Q. This quarter, we are including the results of our business broken out into two operating segments, which we are calling our Terminals & Infrastructure segment and our Ships segment. In the past, volumes were the biggest indicator of revenues. But where the business is today, we have a much more diversified portfolio of cash flows. In our Terminals and Infrastructure segment, we make money through gas sales at our regasification terminals, power sales, which include capacity payments, long-term sales under PPAs and merchant revenues, direct-to-consumer small-scale gas and power sales, including equipment rental charges, and trading activities of our LNG cargo portfolio. Also, we have our ship segment that makes money from both the long-term charter of vessels out to third parties and trading the vessels in the spot market. This segment includes the 11 GMLP assets and the two LNG carriers that were acquired in the Hygo transaction. Now the nuance in this segment is that as vessels go off hire to third parties and then are used as part of our downstream gas sales, the cost of that ship would be included in operating expense in the terminals and infrastructure segment. The second major change about the way our financials are reported is a…

Great, thanks. So the last section I put in here is one on valuation. And maybe even before I get to that, just to kind of summarize the half point of the year, I think this is -- we're in the public markets, we're in the business of providing quarterly updates, those are pretty short periods of time. A six-month update and a one-year update is a good scorecard to look at how we've done. When I rolled back at the beginning of the year, and I think of the decisions we made to make the two large corporate acquisitions, I've got a few thoughts about it. We've made, as I said, plenty of poor decisions over time and a handful of good ones, and I think that these are both going to go down as very, very good investments. Just when you think about the Hygo transactions, what we bought at the time was $130 million in cash flow, we paid about $3 billion for it. Now we have late-stage developments in Santa Catarina, Barcarena, and in Suape but we're still missing a handful of the permits to complete on it, and we had, as Andrew said, basically, no commercial contracts at the time. So it was an aggressive acquisition, but it was one that was based on the market opportunity that we saw in front of us, which has only improved actually since we have done it. And it was our belief that we could actually also given our experience in the development business, take this from being close to be completed to actually completed. And so where are we now? We finished the permits and we signed PC on Santa Catarina and Barcarena and Suape is right behind. As Andrew said, we'll sign next week, long-term commercial…

[Operator Instructions]. Your first question comes from Spiro Dounis, Credit Suisse.

Hey, good morning. First one for you. The slides pointed to a transition in the current year, just sort of between going from a development company to an operating company. I feel like this is probably the first quarter where we haven't really seen a sort of new big initiative announced. So curious, is this kind of the pivot now towards full-bore execution on the products in front of you and kind of what you see is what you get?

No. I mean, we actually made announcements because this quarter we had actually had an agreement in Sri Lanka, which is 20 million people that doesn't have a natural gas line. So we think it's a huge opportunity. And there's a handful of other new opportunities that are out there. So those are all things that are in the works. What's very clear though is that with the current list of businesses that we have and the market opportunities in front of them, we can generate we think, billions of dollars in repeatable income from the existing assets. So that obviously is the focus. I mean the company has really got three very distinct phases. The first is the development stage of going into a market, identifying the opportunity, getting permits and building something, number one. Number two, is then to commercialize that and that's where we're right in the thick of been doing in Brazil right now. It's hard to commercialize until the actual assets exist. Our assets that exist now changes everything. So I was down in Mexico for the opening of that terminal, we're going to host investors down there in the month of September, so if you're interested to be a good field to go and see firsthand what is down there. But these are massive infrastructure assets that are irreplaceable, and they're amazing. I think they are works of beauty. And the works of beauty not only because they look great, but because the economic potential that they have is actually really substantial. And the third part of it is then just the operations. And so operations, we're going to go from a development company to a commercial company to an operating company when you think of it right now. And so at the end…

Got it. Understood. That's helpful. And if you could just sit on that. Just in terms of the countries, obviously, you're now in Asia, if you see at least one of those two or three it is also going to be in Asia, and just curious if you can help us triangulate around that?

Asia, Africa, those are big markets, more in South America, more in Central America, more opportunities in Mexico. And we're -- I mean I read your note I looked at the other notes this morning. I think you guys -- I honestly think that the market is missing the point a little bit. When you develop these terminals, it's not the endpoint of the commercial transactions, it's the beginning point of them. In each of these markets, as I said, you're going to see more transition of fuels in power plants in places like Puerto Rico and Mexico, absolutely. You're going to see significant bunkering. I mean it's not in any year in house, the bunkering opportunity in the marketplace is gigantic. One ship that fills up -- just to put it in context, one ship that fills up in Jamaica is going to take on 10,000 to 12,000 cubic meters of fuel in one loading. Mean any kind of bunkering activity in Jamaica has the possibility of doubling or tripling the volumes that run through the country, and they're already quite substantial. So these are essential pieces of infrastructure with massive organic opportunities and our development yields on them on next year's numbers are 15%. And whether you or other analysts, I hear people are concerned about the execution of this, I think you missed the point. With all the money in the world, you can't go back and rewind the clock. The developments that Andrew is talking about in Brazil, those developments for the most part, started in 2015 and 2016. So they are right now at the point of turning on and the commercial opportunities are just beginning. And so I think it's -- at the end of the day, it is what it is, and the…

Yes, perfect. No push back at the utilization -- in the system. Sorry, second one for me, and I'll be quick about it. Just in terms of CAPEX and timing, it is likely a pretty clearly, you've got sources and uses lined up pretty nicely in terms of total dollars. Just curious, as you think about that sort of timing when the sources come in and when those users have to go out, any sort of gap that could materialize there and then how you plug it if that happens?

Hey Spiro, it's Chris. So obviously, the biggest driver that changes how you use cash flows from operations to fund CAPEX is the pace of that CAPEX. So when we take FID, I'll just walk through very quickly an example. When we take FID on a new terminal or a power plant, that begins the development cycle, which usually lasts somewhere between 9 to 18 months depending on the project, the geography, the greenfield versus something with existing infrastructure, etcetera. So initially, the costs are largely engineering or permitting or other soft costs that may have some deposits on long lead procurement items. Then the project will pick up, you'll have more labor, more construction activities, and then finally, commissioning and commercial operations. If I oversimplify, there's about 10% of the total CAPEX spent in the first quarter of the project, about 10% spent in the second quarter of the project. And then it ramps to about 50% being spent in the back half of the development time line. But here's an important point, it leaves around 30% of the CAPEX spent post COD, which provides both a little bit of a warranty against the providers of equipment and services, but it also allows us to match the CAPEX outlay with some of the cash flows from operations.

Got it, its helpful Chris. Thanks Chris. Thank you Wes.

You bet, thank you.

Your next question comes from Alonso Garcia, Scotiabank.

Thanks, hey guys, good morning. Maybe honing in on Brazil and Wes, you alluded to this a little bit, but thinking more about your competitive position, obviously the opening of the gas market is allowed for new entrants and from your slides here, it looks like you're participating in a couple of public tenders for Suape, in Santa Catarina. I guess how do you see the competitive landscape there, I mean, obviously, it doesn't seem like other developers can provide what you can in those markets with your projects under development, but I wonder if you can talk to your competitive advantage at all?

I'll let Andrew talk about it in a second. But I think the big picture in Brazil is that you've got a massive country. It has been served by monopoly, by Petrobras historically, but it's actually really changed. And the other big aspect of the market is it's a market that is dominated by hydroelectric power, 65%, 70% of it that is currently experiencing the 100-year drought that may be not a 100-year drought because maybe this is the way that it's going to be going forward. And so when you shift people need electricity, and they shift those gas supplies onshore to providing electricity, you end up with massive gas shortages and the prices then reflect that, and it's a bit of a mess. And that bit of a mess creates an unbelievable competitive dynamic, unbelievable competitive dynamics. And really, I think long-term planning in Brazil has always been focused on the offshore gas because there's so much in the pre-salt gas fields that are there. Those are long ways from being realized. Those are substantial competitive or just industrial challenges and bringing it onshore is very, very expensive to do so. And so I think long term, we believe that there will be gas that comes in from offshore, but it's not going to be any time soon. And so what you got today is exactly as Andrew described it, which is you've got these terminals that are in place, they'll be completed. They're EPCs. So unlike a lot of the other developments we've done, which have been self-developed essentially, we've got third-party price certain, time certain contracts to be developed, and we have massive like industrial contracts as a result of it. And I think that we are literally just scratching the surface. Each one of these terminals represents a portal into that geography and the often grid opportunities, both at power plants and industrial customers up and down Brazil is really gigantic. So Andrew?

Yes, it's a great and layered question because we're doing so much across power gas, soft grid, etcetera, but let me try to quickly hit a couple of things. So on the terminal side, on the commercial side and then kind of on the overall demand side. So terminals, there's two things we really think about in combination. One is we have a really big head start. So permitting in Brazil is hard, it takes a long time. Buying Hygo gave us a great head start on strategically located terminals. So what I mean by that is Barcarena is a sole point of gas in the Northwest, mouth of the Amazon Basin. Suape is at the end of the kind of coastal pipeline system in the Northeast and in a region that needs energy, needs gas, and is traditionally economically kind of worse off than the rest of Brazil. And then in the South, kind of at the end of the Bolivia pipeline system, Bolivian gas is drying up. And so I think -- what I think about it is a head start and we also got to realize we're sort of not in the middle of things, right? We're not -- these aren't terminals kind of in the middle of Sao Paulo, where all the offshore gas is coming online. These are terminals that are really thoughtfully located to take advantage of all of the kind of trends we're seeing, which is high transport cost, high molecule costs, etcetera. That leads me into what I'm seeing every day on the commercial side, which is our contracts versus Petrobras contracts. And so we have a lot more flexibility than a state-owned monopoly that is basically charging people kind of various fees that don't need to be there, a total lack…

Great. No, that's really helpful, Andrew, appreciate that. And this one might also be for you. I guess as a follow-up, it's been several months that you guys highlighted it was $1.50 to $2.50 per MBtu margins for Brazil. And it sounds now that you're -- I mean, you are advancing on the commercial side here with the industrial contract and some others underway. Are you expecting to see higher margins there, is that sort of a fair characterization, or I guess, can you talk to how the economics are developing there?

It's really both higher and lower. I mean the estimate we gave is kind of a blend of it all, and I think ultimately the margin for the country will be a question of how much of it is off-grid. It's in the higher margin versus the on the pipelines, higher volumes, lower prices. But I think we feel very, very good about pricing overall and the estimate we gave before, we think is a very good one. But -- so I think on pricing, we feel like the guidance we've given in the past is what we expect in the future. I think on volumes, I think it's possible we have greatly underestimated what the volumes can really be. Both given what the landscape of what's happening down there and just now that we're seeing as we get closer to completion of the developments and really start to get into real serious commercial conversations.

Got it, great, and I appreciate it.

Your next question comes from Sean Morgan, Evercore.

Thanks. Hey Wes, I know you guys are obviously going to try to do the FLNG a little bit more expeditiously than we've seen in the past. And I think now that you're a 50% owner in the Hilli, you're probably well acquainted with the history of that project. And I think one of the biggest sticking points was that Golar's partner had a lot of leverage over the pace of production. And so it's likely that the fourth trend is not going to be fully utilized before the contract expires. So as you sort of look at potential E&P partners for the Shawfield well developments, how are you sort of weighing tolling agreements versus just control of the E&P and then having like the ability to sort of set the pace of development of those assets?

Well, I think the Hilli is a great learning experience, right. So it's certainly good to see it firsthand and see how well it operates. I think that is basically a net lease asset for the moment, right. Now it's a piece of equipment that's leased out, as you said, and they don't really control the production of the LNG, at least at this point, and that could change obviously, but that's where it is today. Our focus is quite different on the projects we're looking at. And really, it could take a lot of different forms. But in the simplest form, it would be to go to somebody that has a current producing oil field that has got a lot of associated gas that they are flaring or reinjecting or not using, right. So that's one, where we would be an offtake partner with them, and we would liquefy and actually monetize that. And so I think there's a special place in having for people that can actually stop flaring and actually also commercialize it. And so those are the highest priorities. But there's a number of different situations and as I said, there's a fair bit of variety of one versus the other. The one thing that is clear is that there is no shortage of stranded gas fields to be monetized. And the approach that I'm taking, which I think is the right one, that we're taking as a company, is we want to be partners with the countries that have got those fields and not only offer them an economic solution for the gas, but also be an industrial partner to help them develop power plants onshore. The gas is cheap enough. I do think on the hydrogen side, cheap feedstock gas is what's going to lead to hydrogen and ammonia production. And it's quite possible maybe a producer of gas in a place, a producer of power, and a producer of ammonia, all in the same place. So there's a lot of different aspects to it. But I think the key thing is owned and control the hardware, which is the FLNG unit, and then find a good commercial partnership that can really benefit both parties, and that's what we're looking for right now. But we have a lot of different, I think, very interesting situations and discussions going on. And I expect that one of them will make a decision and one of them here in the very short term.

Okay. And it's good to see that the former GMLP assets are contributing, I guess, really at the revenue level NFE operating income level. But have you found identified new ways since you've kind of taken control of those assets to use them internally that you can kind of talk about or at least existing plans?

Well, I think we'll be reporting this in third quarter results, but I already know what some of the results are because we're in the middle of the third quarter. But what's happened for the first time, you see really the benefits of having an integrated gas and ship and power business and it allows you to move into different transactions. So for example, the high prices in gas in the world with shortage of gas have led to some very, very high prices and transactions that are out there. And the ability to access those is in part having gas is in part having access to ships. And so I think we'll have some good things to talk about with that, I think, in the very near term, but I need to run the second quarter results, not the third quarter results. But there are some clear examples of why having that integration is really useful and necessary. The biggest cost that we have in our business is gas, the second biggest cost we have in our business is ships. And so these are -- from a defensive standpoint, we want to mitigate our exposure to changes in prices and cost. But also there is a material upside to then being able to take advantage of a situation where somebody may need some gas and situation if you have both the gas and you have the transportation to get it where you can take advantage of that. So there's some very tangible, very specific things there that we'll talk about. But it's really good. And I think that it's just part of the development cycle as a company. As we move from building stuff to now operating stuff, we want to have best-in-class capabilities in every aspect of it. And I think we do. The development side, I feel great about the gas that I feel great about the ship side, we feel great about. And now just making those all work together in harmony is what really creates the opportunities.

Okay, thanks Wes.

Your last question comes from Devin Ryan, JMP Securities.

Hey, great. Good morning Wes, and appreciate you guys squeezing me in here. I just want to talk a little bit more about Brazil, I guess, to start. And I really appreciate the update on the power challenges and how that's accelerating the opportunity for NFE, curious how the contract or how long the contracts are that you're signing, how much more infrastructure outside of what NFE is doing is being kind of compensated and brought online, and just whether some of the solutions you're looking at are to bridge the gap versus real kind of long-term kind of operating opportunities?

Thanks for the question. It's a mix. I wouldn't say there's anything that I feel like is bridging the gap necessarily. So I'd like to kind of move away from that. But then I'll say that our contracts are a mix kind of just based on where we are in the market. So if you look at Barcarena, I think you'll tend to see longer contract terms there because obviously, we're coming into a market where we're shifting from HFO and diesel-based fuels to gas. And actually, I think a lot of those consumers want to have kind of longer-term price certainty. On the pipeline, I think you're going to see kind of five-year type contracts, which are a little bit more in line with what people are used to doing on the pipeline, but actually for them represent a decent amount of term. And I think one of the things we feel like from a value proposition stand, what we can do is offer that term instead of what they have with Petrobras today, where they basically have one or two year terms, and frankly, they have quarterly re-ratings of the price based on the Brent price level at the time. And so on the pipeline for those guys, five years actually is a long term. And then on the off-grid stuff, I think you're seeing kind of somewhere in the middle of five to ten year terms. And so it depends on the customer for sure. It doesn't look that different, I think, than the rest of our business. Barcarena, like I think we said is always going to look a little bit more like the rest of the NFE portfolio. And I think we'll be able soon to kind of show you some of those details probably next quarter. But on the pipeline, it's a little bit shorter, but I still think we're expressing our value in having some longer term than they have today.

Yes. I mean the first two big contracts, though, one is a five-year, one is the 15-year and these are for one million-plus gallons. I mean, so these are very significant [indiscernible]. Andrew gives the right color. The pipeline stuff is likely to be shorter, longer than what the current tenure is, but shorter. But there's real term, especially at the end of the pipeline. So...

Okay. That's great color. I appreciate it. And then just a bigger picture question, Wes. I think there's a lot of variables. As you think about the longer-term leverage in the operating model as you scale and as you create this I think logistics chain that's differentiated in the kind of the broader network effect that you're building, which I also think is accelerating the competitive advantage, can you maybe talk about incremental margin potential as you kind of scale into the next phase? And how we should think about like operating leverage and whether that will accelerate as there's greater scale and also just where we should think about that capping out as we're just kind of thinking about maybe the long model beyond the next few years?

Yes, I think that the example that I gave in terms of the capital we invested versus the returns it generates is a useful one. So $1 billion out, $7 billion in is kind of a development yield that broad side of the barn is the margins for the overall business. If the $1 billion goes to $2 billion, as we actually get a bunch of organic growth and the capital stays relatively the same, then you've kind of doubled that from 15% to 30%. And list the number of infrastructure development companies on earth that have 15% to 30% development yields, I think it will be a pretty short conversation. And so it's an extraordinary business. And as I said, I think I'm a little bit frustrated because people are very focused on, maybe just rightly so, on this quarter and this dollar and that dollar, I think that it is abundantly clear to me that we are headed to $1 billion plus in margin. And that alone as a development yield on infrastructure is an extraordinary business. And it's one that has massive additional needs. If you look at the energy equivalency in terms of like what people's access to energy is around the world. So energy poverty is a huge thing. It's massive needs, and it has massive competitive natural advantages. It takes many years and many billions of dollars to get to a place where we are right now. And so I feel like the offering of the company right now is an extraordinary one. And so it's just -- and you don't have to wait years from now and wait and see how things work out. You can see tangibly what the results are right now, and we expect it will be for the rest of this year and then going into next year. So yes, I think development yields in the mid-teens that double that if you actually hit your kind of organic goals. That's a simple way of thinking about it, it's kind of how I think about it, and I think that's extraordinary. So...

Okay, great. Well, thank you. I appreciate it.

Great, well thanks everyone for dialing in middle of the summer. I hope everyone has a great remainder of August. So back in the summer has come up quickly. And as I mentioned, we're definitely going to host a trip pending COVID and everything else in September. We'd love to -- if you're interested in your host on that, talk to Josh, our Investor Relations folks, and we look forward to seeing you all soon. Thanks very much.

This concludes today's conference call. You may now disconnect.