Good day, and thank you for standing by. Welcome to the New Fortress Energy Third Quarter 2021 Earnings Conference Call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Josh Kane with Investor Relations. Please go ahead.

Thank you. I would like to welcome you to the New Fortress Energy Third 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 today, we are 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, and welcome, everyone. As usual, please refer to the earnings deck that we sent out to you. That's what we're going to walk through here in just the next few minutes. So with that, let's just turn to the beginning. So Page 4. Excellent, excellent quarter. Not only did we hit the margins that we had laid out for you just a month ago, but we've increased those forecasts by roughly 50% since the beginning of the year. We did this not by being long the market by making some directional bet, but rather, we did this by utilizing our portfolio of assets and terminals around the world combined with their supply to put ourselves in a great position to take advantage of the market opportunities. By the numbers, for the quarter, $210 million in margin. In July, when we gave an update as to what we thought expectations should be for the rest of the year, we had a $171 million. It's obviously a significant beat to that. And the fourth quarter, our estimate now is $375 million. So right on top of where we thought we were a few weeks ago. 98% of the revenues are booked for the quarter. So that's obviously something which we feel is pretty well baked at this point. That was $184 million this summer. So in total, an uplift in earnings from middle of the year to the second half of the year and estimates of $219 million, $585 million in total operating margin for the second half of the year, annualized obviously well over $1 billion, puts us on a very, very good track to achieve our goals for next year and the years after. So $1.1 billion 2022, $1.5 billion in 2023. So very, very good by…

Thanks, Wes. So two pages on Brazil here. And what we want to do is provide a quick macro update on the energy shortage in Brazil and then talk about how that's leading to new business opportunities for NFE. So looking at Page 11, I wanted to provide a continued update on what we've been tracking in terms of energy shortage. So on the left side, kind of as we've been showing with low hydro resource and low reservoir levels in Brazil, of course, leading to low generation numbers for the hydro capacity. So Brazil has about 65% of its installed capacity as hydro. And then last month, those hydros have been providing only about 20% of the actual power supply. So since August 2020, Brazil is actually experiencing the worst hydrological period in the last 100 years. And we're seeing that play out in the actual generation data here on the left side. On the right, what we're showing is that the compensation mechanism for this is almost entirely new LNG supply. So Brazil historically has imported about 3 million to 4 million gallons a day given kind of the 2018, 2019 numbers. But in the last few months, Brazil has been importing 19 million gallons a day in September and 18 million gallons a day in October, and on track for obviously a record year in terms of LNG supply and in terms of thermal power generation. One of the things we find interesting about the graph on the right, which is that we break down the historical supply balance also for domestic gas and for Bolivian gas imports, which you can see over the last 5 years have both either been static or declining. And so not only is kind of new thermal power the avenue of…

Great Thanks, Andrew. Let's talk for a minute about FLNG, and we'll start with my favorite cartoon on Page 14. So just as a reminder for people, what is Fast LNG, it's just basically using existing marine infrastructure to place liquefaction materials onto it. Why do this? Because it's, a, faster; and b, cheaper. So half as much time, half as much capital. And as I said, we went FID on FLNG 1 and the long lead items and that's under construction right now. And the punchline is on time and on budget, expected to be mechanically complete in the middle of next year and then allowing for 3 or 4 months for commissioning. We think we're ready to deploy that at the end of the year. If you look at the business opportunities on Page 15, they fall into 1 of 2 different camps. Basically, we can take this year, and we can deploy it for others and charge them rent for it. So that's essentially what we have with the Hilli, which we own 50% of. That's a tolling relationship where we build, own and operate, we collect rent from high credit quality tenants. It produces stable and long-term cash flows. Great utilization of the IP, the significant IP that we have here from the technical side to basically create this on behalf of others. The second path is to basically do it for ourselves. So again, we build, own and operate. We own the volumes less predictable cash flows, but the risk is greatly mitigated by the terminals and the downstream operations that we have, and it has the potential to generate significant windfalls. So if you just flip to Page 16, on the tolling side, we have a use case in the form of the Hilli,…

Yes. Thanks, Wes. Good morning, everybody, and thank you for your time. I wanted to start today with a comment on the amazing work that NFE's employees are accomplishing in partnership with our customers. NFE is now over 800 employees strong, and they work every day to lower energy costs and decarbonize the communities in which we operate. It's a privilege to work alongside these individuals who make our fight against energy poverty possible. And it's as a result of these employees the graph on Slide 25 shows our hyperbolic growth over the last several quarters. In a little over 5 years, NFE has gone from a small development company to a world leading energy infrastructure business. In fact, if you go back to the initial operations, the online date of our liquefier in Miami took us 18 quarters to get to positive operating margin. Yet in the last year, we've transitioned over $1 billion in annualized margin. Further, as this slide details at the time of our IPO in early 2019, we had negative margin in a fraction of our current employees. Our infrastructure footprint is no less impressive. In 2019, we had only 11 customers across 3 assets in 2 countries. Today, we have well over 50 customers across 20 assets in 12 different geographies covering all sides of the globe. Our earnings profile is large, extremely diverse and continues to expand every day to become increasingly stable, predictable and heavily growth oriented. On this page, we highlight the financial performance for 2H 2021, which will be nearly $1.2 billion of annualized operating margin. And as Wes said earlier, we are forecasting $375 million for Q4, of which 98% of those cash flows come from contracts already executed and nominations received from our customers. Now turning our attention…

Yes. Just before we go to questions, if you flip back in the appendix, Pages 29 through 32, for you credit investors on the phone, these pages are for you. I mean basically, it's just a continuation of what Chris just laid out. When we did our first corporate bond issuance, which was in July of 2020, so only 15 or 16 months ago -- it seems like 15 or 16 years ago, there's been a lot that's happened in that period. But at that time, when we spent time with the agencies, and made our case for what we thought the creditworthiness of our business, they obviously agreed to an extent, which is why we got the high single B rating. They said basically the 3 pillars that we needed to address to kind of justify a better rating were the ones that we show on Page 29. And they are simply more earnings, more diversity and more operational history. And in a short period of time, we've made a remarkable amount of progress in all 3 of those. So at the time of the initial rating, our operating margin was $200 million. Operating margin for the second half of this year, $585 million, $1.1 billion this year. So obviously, have had tremendous growth in earnings. On a diversification standpoint, at the time of the rating, we had 3 terminals, 37 customers, 2 geographies. Today, we have 11 terminals, over 100 customers in 11 different geographies. So massive, massive change in the diversified footprint of our business. Operationally, at the time that we did our initial bond transaction, we had no owned ships, and we had 300 employees and limited operational experience. Today, we have over 800 employees, a very robust ship portfolio, a ship portfolio that is not…

[Operator Instructions]. Our first question comes from Spiro Dounis at Credit Suisse.

First question from me, just a 2-parter on Fast LNG. I guess based on some of the fine tuning of the strategy here in this morning, it seems like you're nearing a commercial agreement there. So first, I'm just curious, Wes, if you've narrowed down to counterparty and a location. I understand you can't disclose it at this point, just curious how close you are? And the second part of the question, I just want to make sure I understand how you're thinking about Fast LNG now. Has it become more of a natural hedge on the business versus a direct supplier to the terminals. And so in a low price environment, you supply the terminals in an asymmetric upside scenario, you sell it to the highest bidder and effectively subsidize any losses elsewhere? Just trying to understand the mechanics.

Great. Well, the answer to the first question is we are having very robust discussions to -- with several counterparties that have significant gas reserves and are looking to monetize them. So the profile of both of them are similar. They're very high credit quality, very large oil and gas companies. Obviously, they have an understanding of the markets and what the market dynamics are. and the availability of our liquefier in the near term is one that is very attractive to them. I mean, it's not an overstatement to say that we are not only possibly but likely to be the only people on planet Earth that has spec developed a liquefier. That's a risk that we have taken on. I think that on the tolling side, that risk is likely to pay off handsomely as we now have an asset that fits their profile. So we are not done on this yet or we'd be talking about that, but I think there's a good chance we have prospects on a number of different fronts on the tolling side. And we think that that's a natural extension of the business. It's really very much along the lines of the Hilli. So that's been a good education for us. And the tolling market, given the market dynamics has improved as well because, again, the value of the product you're creating is more valuable. So therefore, it's just better. On the merchant side of it, I think it's very, very clear what the path it is, is that if you can create merchant volumes at a low absolute price, and you know that you have the backstop of accessing these high-volume markets so that to the extent that the market opportunity is a modest one, you can always just utilize your…

Got it. That's helpful color. Second question, just switching gears to blue ammonia. It sounds like you're being pretty close to sanctioning that. And so I know at one point, Zero Parks was supposed to be spun out, and I think incubate that asset. So I'm just curious if we can get an update on where that spinout potentially is. And as we think about funding the CapEx for pneumonia, where -- or I guess, which entity is going to sort of shoulder that, and if you can give us a rough sense on how to think about that?

Yes, it's going to be a modest amount of cash flow we think. I said I think that we haven't made a final determination for how exactly we will capitalize it. But I think in simple terms, the size of the facility that we're looking at initially is roughly $400 million. We're doing that in partnership with the FTAI guys. Ken Nicholson is sitting in the room with us. Now, maybe you can give a little bit of color on this. But I think we expect to be able to finance the lion's share of that capital with tax-exempt financing. So that's one of the secret weapons of these ports financings and terminal financings that we've got, and we've got some pretty good examples of that, but that's how we think about it. In terms of that company existing either inside of NFE or spun out, that's something obviously that the Board and management needs to spend some serious time on. I do think that over time, the opportunities in the hydrogen and transition energy space are so vast that having a separate identity if that makes sense. But -- so I don't think it's ultimately a question of if it should have its own separate identity, but really one more of when it should do so. But Ken, you have some thoughts on you have some flows.

Yes, I'd just say, Spiro, on the financing point. As Wes said, we have had a lot of success at FTAI with tax-exempt financings. You can get pretty high leverage at very, very low rates. It's been a particularly strong market with the new tax and spending policies that are coming out of the federal government, so there's fair amount of demand for tax-exempt securities. We did a big tax-exempt financing at our Jefferson terminal at FTAI over the summer, average rates there, unrated were 2%. For this particular project, most of the expenses and construction costs are eligible for tax-exempt financing. So for a $400 million facility, we should be able to get somewhere between $300 million and $350 million of debt financing against it.

Our next question comes from Sam Margolin of Wolfe Research.

Pretty robust price realization there. Can you just talk a little bit about maybe the business model in Santa Catarina against that power backdrop? Is it going to be sort of a fixed fee terminal business? Or do you envision yourself taking some variable cost economics there against the power capacity?

Yes. Thanks for the question. We think it's a great outcome on the power auction and really the right thing for the region and the power shortages. So I think the business will look a lot like our other terminals. We'll have, at Santa Catarina, all sources of downstream demand, so power, industrial, even consumer and residential, and then what we think can be a very kind of robust off-grid or small-scale ISO-container business as well. We don't think about it as any sort of different model. I think you're mentioning almost like a fixed fee model or anything, but we expect to supply gas to our customers through our terminal just like we do everywhere else. And dynamics of the region or access to the pipeline and kind of the overall macro backdrop makes Santa Catarina a really interesting project for us.

And then just a follow-up. I think this is for Chris. We've had an inflection here in operating margin. And I think the next phase of the evolution is sort of converting operating margin to cash -- And so recognizing there's a lot of volatility in the underlying commodity in 3Q, there's going to be working capital variance. But can you just help us think about maybe in 2022 as some of these recent terminal scale, how we should think about operating margin sort of flowing to cash flow. I think you kind of said it on a high level, it's a robust cash flow business, but maybe some of the mechanics there on a go-forward basis.

Yes. I mean, so holding aside factors like moving working capital, which happens now as things are turning on and you have more LNG that's being purchased and is being sold for very points in time. The way to think about op margin is reduce it by SG&A, reduce it by your interest expense and reduced it by your tax expense. And truthfully, we think that if you take $1 billion to growing to over $1.5 billion in op margin by the end of next year, reduce that by $100 million, hopefully, that's going down on the cost to kind of run the core business. Reduce it by current interest expense, which is about -- they call it interest plus amortization, Sam, $300 million to $400 million. We obviously want to reduce or eliminate amort through refinancing, as I mentioned. But the goal would be to take by the end of next year, $1.5 billion in run rate down by SG&A, down by interest expense and amortization, leaving you close to $1 billion available for reinvestment. That will be taxed and taxed at varying rates across the business. I'm happy to work with you offline on tax through the model. But I think you can definitely see your way to close to $1 billion of cash to the balance sheet annually.

Our next question comes from Sean Morgan of Evercore.

So just going back to the Brazil power auction. So trying to understand the mechanics of that -- those contracts a little bit. That $0.14 per kilowatt, how would that translate, I guess, on a revenue and a gross margin perspective for MMBtu to kind of, I guess, sort of fit with the existing guidance we have for the models?

Yes. So I don't think we're ready to disclose kind of those details yet, but I'll give you a little bit on how the power option works. So new power producers bid both for an energy price, so like a cent per kilowatt hour price, and they also get a fixed capacity payment. And so what we're kind of trying to message here is that given the kind of need for return on capital over the 44-month period of the PPAs and sort of Brazil is strong incentive to incentivize new power generation. These prices cleared at high levels on the power side. And so I think that's the kind of the point of our message here, and we can show some of that breakdown. And as we, I think, get into that business, we'd be able to show kind of more granularity on how we fit into it. But I think for now, our message, we're just trying to show that, obviously, this is an auction that clears at a very high price, which is recognizing the very high need for new power in the region.

Yes. I mean in simple terms, the cost of electricity in response to this emergency auction was roughly double what the long-term cost was previously. So that's a very direct, like what happened to the consumers, what happen in the market. They needed power. There's a lack of hydroelectric power. And so they ran an auction and competitively it cleared at roughly 2x what it was before. So obviously, we're working hard to support in those people that want to provide the power. And by doing so, we'll do so with our volumes, but our margins will be obviously higher than they would have been previous to the market move. So -- but we don't -- as Andrew said, we don't really break out margins by asset or terminal or individual transaction. I don't think that, that's a productive path.

Okay. So just a follow-up, though, on the structure of that. Is it going to look like Sergipe where dispatch backup power for hydro? Or will it be baseload power? Or you guys are pursuing a consistent amount of volumes every quarter after the facilities come online?

Yes. Thanks for the question because that's actually mostly public information on the auction. It's baseload power. So most of the plants that cleared are 100% base load. A couple are a little bit less than that. But -- It's totally different in Sergipe.

Okay. And then just really quickly on the FLNGs, will those facilities be either or merchant or tolling, like, i.e., you bring on a new project, it will be either tolling or merchant or could they be mixed-use FLNG projects?

They definitely could be mixed use. I think that right now, we are down a path where we're talking to people about a tolling arrangement where they just use the infrastructure to access their own gas assets. We're also then looking at situations where we could buy gas and generate ourselves. So right now, they really are in 1 of the 2 camps, but it's entirely conceivable that we would do some kind of transaction where we would both be the tolling provider and also then take some of the volumes. But right now, they're in 1 camp or the other. But there's no reason why they couldn't be combined.

Our next question comes from Greg Lewis of BTIG.

I guess I was hoping you could kind of parcel through the sequential margin increase. Is there any kind of way to think about Q3 margin growth versus Q2 in terms of -- how much of that was driven by shipping and maybe how much of that was driven by whether you want to call it merchant power or other?

Well, the -- at the end of the day, the volumes that we sell are to customers, where there are customers that are buying both for us or customers that are buying long term for us. And so we don't really break out and differentiate between those. We gave I think, pretty clear guidance on what we expect our margins to be in the ordinary course. And so when you look at 2022 estimates of $1.1 billion, those are very much in the ordinary course and are not really looking at kind of asymmetrical market changes. As we get access to volumes, and that's where the FLNG is so important, those numbers could change dramatically. But what I would say is that and I mentioned this right at the beginning, I think that the remarkable aspect of the results that we have is that we did this in a market environment where we went into it actually modestly short in terms of short-term supply. And so we didn't take some market directional debt that actually paid off, right? That's -- That sounds great, but it's very hard to outperform the market for an extended period of time. We had a very market neutral position to one that was modestly short in the short term and that resulted in us actually generating substantial returns because the flexibility that is afforded by the infrastructure we have is remarkably valuable, and the numbers are the numbers. But I think that -- again, we don't break out margin by individual customer or a terminal. We don't think that's a it's a productive way of doing it at all. But the results speak for themselves. We went into a market where we didn't have a market directional bet on and are going to make $585 million in the second half of the year, right? So -- and have given really clear guidance as to what we expect to happen next year and the year after in -- that are absent any kind of asymmetrical really returns. So...

Okay. Okay. And then if I think about the merchant power opportunity. I mean, clearly, what's [indiscernible] Brazil, low water, [indiscernible] probably needs more low water. Is there any -- and I guess you gave Q4 guidance, is there any way to kind of think about the lead times for the merchant power opportunities, i.e., should we be thinking that as we think about maybe what Q1 could look like, we'll just be continually getting updates because the lead times on those are a couple of months? Is that kind of the way to think about like it's at Sergipe and elsewhere?

Yes. I think there's kind of two types of opportunities there, right? So I think in something like Sergipe, where you kind of have exposure to the power market, you're able to capitalize on things as they happen in a kind of day-to-day power market. And then we have opportunities that I think are going to look more like the emergency power option we're talking about today. We kind of have a little bit longer-term procurement cycle, but in this case, actually pretty fast, from going to kind of 0 to built on new power plants. And so I think we'll see the sort of regulatory mechanism work in both ways. And the point for us, I think, is just being situated to capitalize on those opportunities as they happen, as well as opportunities outside of power that we're going to see coming as we're really feeling the shortages of kind of energy broadly, we feel like our terminals there are obviously well positioned sort of geographically and in markets and with customers to take advantage of this.

Our next question comes from Craig Shere of Tuohy Brothers.

Thanks for putting me in on the 2 MTPA example for merchant capacity, two questions. Is the 1.2 MTPA project, kind of still the cookie cutter. And are we thinking that maybe by the end of next year, we could have 3 total projects, either operating or, well, pass FID?

The answer to the first question is yes. It's actually -- the dimensions of the infrastructure is actually 1.4 million tons, we kind of rounded it down. Obviously, the actual production is in part a function of the weather conditions. And obviously, if it's warmer, you're a little bit less efficient in terms of it. But the 1.2 is related to the 1.4. So 1.4 is the actual technical specifications for the year and 1.2 is a guess on it. The 2 million tons we did just simply round it, Craig, we think all these numbers assume 1 or 2 deployments, and we think that there may be many, many more than that. And really, what we are working very hard to create is a factory-like environment for the production of our infrastructure that allows us then to service both customer needs on the tolling side and our merchant needs of our portfolio. And I think that again, the dimensions of the business are one where you have $1 billion to $1.5 billion or more on the business in the ordinary course and the potential to have extraordinary returns if these 100-year floods continue to crop up on an annual basis, which is what we think. I mean, I guess my last thought on it would be when I look at the valuation of the company, I think we are very, very undervalued as a value stock, right? So we're trading at a single-digit number based on actual earnings, which is a value stock metrics -- And for an infrastructure business that typically trades at 2 or 3x that. It seems like we're very, very undervalued from a value stock, and we're a growth company. we have had massive growth. The actual -- the number of companies on planet Earth that started business as a public company 17 quarters ago that are going to generate $1 billion in cash flow is a pretty limited number. And that is just the beginning of it. So I feel like valuation, we've got a long ways to go. We've got asymmetrical exposure to probably the most significant energy-related market in the world. And the energy transition, which we have done -- we were an early adopter of -- that's been a focus of ours from day 1. And we think we're at the one yard line in terms of having an investable product to take advantage of that. So I do think that over time, water finds its own level and we'll get by it appropriately. But I do think it is a massive point of inflection for the company and hopefully the evaluating starts to reflect that.

And a quick follow-up. Could you opine on the ability of floaters versus just jack-ups to materially expand the potential opportunity set here?

There's a lot of ships that are available, right? That's one of the things that led us to this solution was that there's an abundance of drill rigs that can be repurposed. There's also the deepwater ships, the Savant ships, which will work in the deeper water installations. There's an abundance of those available as well. We think both -- I mean what we're really looking for at the end of the day, is roughly 100,000 square feet of deck space to basically put your modules on to. And so there's a much more technical solution to that in terms of the weight and bearing distribution and whatnot is what we're looking for. But you're really looking to be able to clear 100,000 square feet of deck space through 1 or more products. And with that, that's a pretty broad swath of infrastructure that's available for both shallow and deeper water installations.

I would now like to turn the call back to Wes Edens for his final remarks.

Terrific. Thanks, operator. And actually, thanks, everybody, for calling in. Obviously, a terrific quarter and a lot of information, but the path for us is getting clearer by the day. And we're happy to have a chance to share with you. Thanks very much.

This concludes today's conference call. Thank you for participating, and you may now disconnect.