New Fortress Energy Inc.

Ladies and gentlemen, thank you for standing by and welcome to the new Fortress Energy first quarter 2021 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touch-tone telephone. As a reminder, this conference's call is being recorded. I would now like to turn the conference over to your host, Josh Kane, with Investor Relations. Please go ahead.

Thank you. I would like to welcome you to the new Fortress Energy first quarter 2021 earnings call. Joining me here today are Wes Edens, our CEO and Chairman of the Board, Chris Genta, our Chief Financial Officer, and Ken Nicholson, Managing Director of Fortress Investment Group and CEO of our new Hydrogen Ventures. 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 to review the risk factors contained in our quarterly report filed with the SEC. Now, I would like to turn the call over to Wes.

Great. Thanks, Josh, and welcome, everyone. As Josh said, we posted the supplement to the webpage, and that's what I'm going to refer to as we go through it. So let's jump right into it and go to page four. The quarter that just ended has been a historic one for us. It's been an incredibly busy quarter and a productive one. We completed the acquisition of the Hygo company from Golar, as well as the MLP that we bought at the same time. $5.1 billion. We did not issue additional equity. It grows our base of operations dramatically, and I'll talk about that a lot down the road. Very importantly is that the growth of the company that we now envision we believe can be internally generated. the equity that we need to grow the company we can generate from asset sales, and we'll talk about that. We expect to close our first asset sale here this quarter. And with this, the total summation of all this activity, this does firmly establish us as the leading LNG to power company in the world and puts us well on our path to kind of our growth targets we've talked to you about before. I mean, in very simple terms, the way I think of it is the combination of Number one, the terminals that we're acquiring in Brazil, which we think are an extraordinary footprint in one of the fastest-growing countries in the world. Number two, the impending turn-on of our terminals that we're building in La Paz and Nicaragua, both of which we expect to be operational in the next 60 days or less. Number three, the addition of all the logistical infrastructure that we need to make this all happen. So the ships and the FSRUs and all the equipment basically that we bought from the MLP that really slides then into our operational footprint. Number four, the developments we've made on the fast LNG. We'll talk about this at some length later, but in simple terms, just simply closing the loop and basically becoming fully integrated to provide our own feedstock we then use in our midstream and downstream businesses around the world changes the the aspirations of our business dramatically, lowers our costs, may actually increase our operating revenues substantially. So fast LNG is a big thing. And lastly, the hydrogen initiative. So as Josh said, I'll introduce Ken Nicholson, who's been a longtime partner of mine at Fortress, who is going to step in and be the CEO of our new hydrogen initiative. We've got a very, very actionable, our first real commercial activity in that sector. And so all this together, the net of it is we think we have put in place all the pieces we need to create the company that we have, and now it's just simply a matter of the work to kind of do that. We'll have a company that generates in excess of a billion dollars in free cash flow. With the FLNG, we've got the ability to grow that substantially, and we now have the commercial actionable hydrogen initiatives that we've been looking for since we first announced this at the beginning of last year. So it's a lot to talk about. So let's flip to page number five. First of all, the terminals that we are under construction in La Paz and Puerto Sandino, Nicaragua, are both moving along extremely well. These are renderings. These renderings will be replaced with the actual photographs in the next one. We probably will host an investor day in early August in La Paz. I think that's the first one that we'll get down to. So, obviously, as we move forward with that, if you're interested in seeing up close the terminals, The logistic footprint of the Isoflex operations in a trip down to La Paz might be well in order now that the COVID stuff seems to be under control a little bit. But Joshua will help us coordinate that. But that's something we think is in the very near term for us. Puerto Sandino, you know, the turbines are in place. The same things are happening there. What this does in terms of the volumes at the bottom of the page is that Our committed volumes go from approximately 2 million gallons today to 3.3 million gallons. So it's a big step up on the committed volumes. In discussion volumes, another 800,000. So it takes our total volumes from the existing five terminals up to just about 4 million gallons. So it's a big, big step. It roughly doubles what our production is right now. Page number six, Brazil. So the punchline is the Brazil terminals we expect to be online by the first quarter of next year. We had the Brazilian development team up here this week. I'll be in Brazil actually on Sunday. So there's a lot of activity there. But there's been years of work that went into these terminals prior to us acquiring them from Hygo. Now that's turning into these actual terminals on a timeline that are going to culminate in turning on in the first part of next year. And we have just started the process of commercializing these assets. But you can see in the bottom, even with a very, very short period of time in the commercialization side, the volumes that we expect out of these portfolios are dramatic. So Santa Catarina in the south, there's a tender that's outstanding for a number of the distribution companies in that. Swape will be in the middle part of the country, the easternmost part of Brazil, will be really anchored by our own power plant, which is – scheduled to be turned on by the end of next year. Bacarena in the north, you know, we signed an LOI with Norse Hydro. That is a terminal that we think will serve the Amazon Basin and has got tremendous potential to be a very, very productive terminal for us. But, you know, bottom line, the Brazilian terminals plus our existing terminals give us a huge footprint and add up to over 16 million gallons of expected volumes. Page seven, we detail what that looks like from us. So, First quarter of this year, 1.4 million gallons a day. There was a scheduled maintenance event in Puerto Rico that took those volumes down. That will be ending here literally any day. That takes us to roughly 2 million gallons per day of normalized volumes. Those then step up substantially with Mexico and Nicaragua and the Sergipe terminal that produces 3.6 million gallons. And then the big step up is as these Brazilian volumes come on next year, 16.2 million gallons. And frankly, there's a lot of upside to that. So this, as I said at the beginning, it's hard to overstate how significant the addition of the Brazilian volumes on top of our existing assets is step two. But you can see that this generates a substantial amount of volumes and margins. Let's talk about FLNG, so fast LNG for a moment. The cartoon on page number nine, we've shown you before. But basically, the contrast is, if you look at the box on the left-hand side, this is what the floating LNG business looked like when we started this. So there's a handful of these assets that exist around the world. We own 50% of one of them. In the Hygo transaction, we bought half of the Healy, which is deployed off the coast of Cameroon. So the basic notion is, put a liquefier onto a ship, put it over a stranded or offshore gas field, generate low-cost LNG. It's actually an incredibly simple concept. That's the good news. The bad news is it costs billions of dollars to build ships like this, and it takes many years to develop it. So those two things were simply not attractive to us in the timeline for what we're trying to achieve. The challenge that I put to the technical team back in January is can we, rather than use a ship, can we put this gear onto existing marine infrastructure that we can do it, A, much faster, and, B, much cheaper, And the answer is simply, yes, we can. And if you look at the following page, there's the two rigs that we bought that are just about ready to move. They'll actually move later this week. They'll move to that Keywood shipyard in the bottom there, and that's where they'll be stripped down from the things that we don't need, where you can then add in the things that we do need. And then the rendering on the right-hand side is what these things will look like when you put them all together. These are on jack-up rigs. There's other types of marine infrastructure we think this works on as well. Jack-up rigs are really suitable for water depths of several hundred feet. Obviously, things like the semi-submersible ships, et cetera, are appropriate for the thousands of feet kind of deployments. The key for us is, we flipped one more page, is to hit the timeline that we're showing here. We declared FID on our first project in March of 2021. We bought these two jack-up rigs. We are very much now hot and heavy on working to supply gas for them. I'll talk about that in just a second, but there's a lot of promise on that side, so I feel good about that. We expect to be complete with our construction of these in July of 2022. It then will take us roughly 90 days to put the gear in place and to commission it and to put it in place on the gas source and to producing LNG by the end of next year. We talk about this literally every day. I have an 8 o'clock call that basically goes through the technical and gas aspects of this. The team is incredibly engaged and competent. And when you look at page number 12, the places where we are looking at are all the major offshore assets around the world. So there's lots and lots of gas in stranded form or other. So Gulf of Mexico, west coast of Mexico, Brazil, west coast of Africa, obviously Southeast Asia. So there's many, many places in the world where there's gas that is a target for us. And so simply we're trying to find the most suitable and most straightforward one for the first one. And I think once we get proof of concept for the first one, there's lots of different places we can go. So there will be more updates of this to come, but the bottom line is that the impact that it can have on our earnings is substantial. So page 13 is a busy page. So this shows all the different terminals with the volumes that are committed in discussion and total volumes and what the margins for those would generate, so the $1.6 billion. In very, very simple terms, if you Simply take our model right now, which is to assume $5.5 is a cost of LNG. With the FLNG, we believe we can lower that cost by $2 or more, and maybe substantially more in certain of these cases. But $2 on 1.4 million tons is about $150 million. So just for illustration, we say, look, if we basically provided gas to all of our terminals through an FLNG solution, it would add roughly a billion dollars in earnings to us. So it's a huge, huge incremental benefit to us. It also defeases a lot of risk of supplies. There's many different elements of it that are positive for us. But more to come with this. But this gives you a pretty clear demonstration of what it is that we're actually playing for. So let's update. And I'm going to turn this over to Ken and introduce him in just a second. But page 15. Just by way of review, so in the first quarter of last year, we announced that we had a goal, and our goal was to basically decarbonize our activities and be a zero emissions company by 2030. So a very, very aggressive goal, a suitably aggressive one, in my view, given the kind of sustainability issues that we've got around the world. We said we're going to now open our phone lines, talk to people, look at technologies, and see what is out there. with a goal towards creating a commercially viable activity that we can then kind of go ahead with. I believe strongly that sustainability comes from profitability, and that if we can actually create commercially viable options to this, that can really advance the ball far more than just simply investing in VC technologies that may or may not have a commercial application. So we did make an investment in green hydrogen, and then we made an investment in an electrolyzer company based in Israel that we think has got promising But the green hydrogen businesses, in my opinion, today are not commercially viable. I think that that will change, and I think that there's reason to be optimistic about that because I think the governments are going to be very supportive of green hydrogen initiatives, and that's great. But we now believe that the actionable opportunity today lies in clean and renewable fuels. And we've got two different initiatives for that. And with this, today we're actually announcing that we have formed a company Zero Parks. Ken Nicholson, who's been a partner of mine at Fortress for many years in the infrastructure business, is going to be the CEO of that business. If you look on page 16, our focus is initially going to be fuels. So big picture, 51 billion tons of greenhouse gases are released in the atmosphere every year, 37 billion tons of CO2. So roughly 75% of all the greenhouse gas are from CO2. Of the CO2, the vast majority of it comes from fuels. The market itself is there's 36 billion barrels of fuels used annually around the world. Less than 1% is renewable or clean. So the market opportunity for the renewable and clean fuels to take a big chunk of that is gigantic. The opportunity as we see it is to replace a big chunk of this with two different pathways. One is renewable fuels, which the way I It's simply the do no harm business. You're not decarbonizing absolutely, but you are keeping more carbonization from happening basically because you're simply taking what exists right now, repurposing it, recycling it, and turn it into a clean fuel. That's what a renewable fuel is. Clean fuel is a different tack at all. So clean is really hydrogen-based. Hydrogen-based means producing it in a clean way. So again, for definition, green hydrogen is one which is created by using renewable power so there's no emissions. Blue hydrogen is one where you're creating hydrogen. There is absolutely CO2 that is created as part of that process. but you essentially are capturing it. So it's clean from an emissions standpoint, just like green. So if you flip to page 17, these are our two paths. And with that, let me turn it over to Ken. And Ken, maybe just introduce yourself and give a bit of background and then talk about our initiative here.

Great. Yeah, happy to do that. Thank you very much, Wes. It's Ken Nicholson here by way of a quick background. I've been working with Wes here at Fortress for Just over 15 years, we've invested over $30 billion in infrastructure, transportation, and energy companies, and I am thrilled to be helping to lead this new venture at NFE. I think we have an enormous opportunity in front of us to make some highly compelling investments and at the same time do a very good thing for the environment along the way, and I am excited to join the team. I'm going to go to page 18. Our goal is to make these two investments that Wes mentioned immediately. To do that, we're forming a new joint venture with FTI that will combine NFE's development and technology know-how with FTI's transportation experience and infrastructure assets. FTI provides three critical needs. One, efficient logistics for feedstock supply. Two, access to land in key markets. And three, immediate access to low-cost tax-exempt financing that enables us to fund our investments quickly and efficiently. The picture on the right side of the page is an image of FTI's terminal in Beaumont, Texas, which is the site we're planning for our first two investments. I personally have been deeply involved in the development of Jefferson. It's an incredible terminal with connectivity to all modes of transportation, plenty of space for additional development, and a track record of obtaining extremely low-cost financing in the tax-exempt markets. Flipping to page 19, as Wes said, we plan to be in a position to reach FID on our first two projects by the end of this summer. One project that produces renewable diesel and jet fuel, the other that produces carbon-free hydrogen and ammonia. For both of the projects, the technology is well-known and readily available. As is the feedstock, we're now focused on securing the offtake for the projects, which we expect to do in the coming months. The box on the right illustrates the attractive economics around these investments. Each project represents capital costs in the range of $200 million to $300 million. and after a roughly 24-month development timeframe, should generate annual cash flows of $50 to $75 million. As I said, we expect to finance both projects largely with tax-exempt debt requiring minimal equity investment, which should in turn result in extremely attractive equity returns. Finally, to realize that value creation, our goal will be to separate XeroParks ultimately into a standalone public company through an IPO of the business.

That's great. Back on page number 18, when you look at the picture of the Jefferson Terminal, Ken is actually being quite modest here. When we first got involved in this terminal, it basically was a muddy piece of ground. 100% of what you see represented in that picture, he oversaw the development of. And when we looked at getting into the fuels business, of course, The most obvious place to start is start with a fuels terminal because, number one, you need all the logistics on either side of it because you need to both bring things in so you can actually create what you're going to create and then bring things back out. So fuels terminal actually accomplishes that. Number two, you need the access to the land so you have enough space to build what it is that you intend to build. And we have a substantial amount of land both at the development and adjacent to the development, which is great. And number three, it's a bit of a superpower, is the ability to finance yourself on a tax-exempt basis. So we have done a number of tax-exempt financings on this development. It's a tried-and-true methodology for us. It allows us to, in a fairly capital-light manner, be able to turn these projects into a reality. And as Ken said, our goal then is if you're a NFE shareholder on the phone here right now, our goal would be that you, for every NFE share that you get, you essentially get a share of this company as well. And I think that the impact of this, the economic impact to shareholders, could be material. When you look at the sustainable projects and companies that are public right now, the vast majority of them are not economically based, so they're more a bet on an aspiration or a dream of what could happen as opposed to what actually is happening. We think that both these projects are very attractive on a standalone basis, and they also represent a small fraction of the size of what this company could actually represent ultimately. So the renewable fuels is just simply a repurposing. You make money from taking what has been discarded and reuse it. That's obviously a big, big benefit. 2005, California started with the renewable fuel credits. It was basically the first step in this direction. we think that there's going to be renewable fuel credits adopted in all probability by virtually every one of the states. And as a result, we'll have a lot of places to distribute these fuels and actually make a good margin on them and do a good thing in terms of their carbon footprint. The blue hydrogen allows you then to create blue hydrogen at an attractive cost, roughly $1 a kilogram net of this, The technology that our technical team has identified is one where I think we can capture in excess of 90% of the emissions in total. So it truly is a very green way to create hydrogen. Once you have that green hydrogen, there's many, many different options that you've got in terms of creating offtake. The simplest may just simply be to turn it into blue ammonia that can be used for fuel or industrial purposes, but there's a number of other things. So these are meaningful steps forward. This is a a very substantial company. I think it'll be a very exciting venture to have on a standalone basis. At NFE, we'll still retain our green hydrogen initiatives, but this is a big step for us. And Ken is an incredibly capable person on top of the technical folks we've got that are working on this. So we think it's a big moment for us. So next, Chris.

Yeah, thanks, Wes. Good morning, everybody. I'm excited to provide an update on our business and financial results for the first quarter of 2021. If you turn to page 21 and taking a quick look, this is our familiar operating statistics summary, which demonstrates the business's strong track record of execution. A key takeaway from this page is that we continue to execute best-in-class operational performance and service to our customers while maintaining a focus on safety and reliability. Also, as we continue to be a global leader in LNG truck and ship transfers, and we're eager to step up our activities later this quarter as our terminals in Mexico and Nicaragua come online. In a moment, I'll talk more about the financial performance during the quarter, but one key data point that we're tracking is our maintenance outages, which are estimated to be within 5% of our expected downtime. This exceptional operating performance is a direct result of the continued hard work and tenacity exhibited by our team. As a company, we are expanding rapidly with over 600 employees now and quickly approaching 1,000 by the end of the year. Our world-class team of professionals now spans the globe and is helping to accelerate energy transition on five continents. If you turn to slide 22, I find this a very helpful page that demonstrates what Wes was talking about earlier, that once our infrastructure is in place, the ensuing cash flow is right around the corner. Sometime in the second half of 2021, we will have all six terminals fully ramped, which sell around 3 million gallons per day. These terminals will produce approximately $600 million of operating margin, and combined with the margin from the shipping fleet, NFE generates over $900 million in operating margins. Moving to the right, you can see as we fully ramp to the over 5 million gallons per day of committed volumes and combine that with our first fast LNG unit, this takes us to 1.2 billion in committed operating margin. One crucial point that we need to call out is the tremendous operating leverage that we have in these terminals. First, as we sell incremental volumes, the fixed cost gets spread over a greater number of units sold and our margins expand. Second, as we pair new high-volume terminals in Brazil and Ireland, With additional FLNG assets, we increase cash flows and make them high-margin terminals as well. If we convert on our in-discussion pipeline, we see a path to sales of over 200 million gallons per day, producing close to $3 billion in operating margin. On slide 23, this is summary financial information for Q1. And as you can see here, the performance for the quarter was very consistent with Q4. During the quarter, we had strong volume performance that was in line with expectations. The Jamalco power plant was down due to some planned maintenance, but volume sold to the Old Harbor power plant more than made up for the downtime. In San Juan, volumes were reduced as one turbine was taken offline for 53 days while PREPA performed maintenance on their unit number five, but importantly, gas supply to unit number six remained uninterrupted. Further, during Q2, PREPA has successfully completed the installation of their selective catalytic reducer, and the asset is expected to return to full volume in the next few days. Revenue for the quarter was $146 million, and cost of goods sold was $113 million, resulting in $33 million of operating margin. Our cost of LNG for the quarter was $6.17, which was exactly what we were projecting on the prior quarter's earnings call. Continuing down the income statement, SG&A expense was around $23 million after normalizing for non-cash compensation, development, and one-time expenses. A driver of this, and as we mentioned on our previous call, is we've ramped headcount in Mexico and Nicaragua in advance of COD, and as these projects become operational, costs will migrate to operating expense from SG&A. As you look at the balance sheet, we had $380 million in cash, which combined with cash flows from operations fully funds our remaining development commitments. And quickly, on the capital market side, in April, we closed our financing for $1.5 billion of 6.5% notes due September 2026, which we used to complete the HIGO and GMLP transactions. Additionally, we have put in place a new $200 million revolver priced at L plus 250 that will give us more operational flexibility as our new terminals come online. And last, a quick comment on growth capital. We have a good portfolio of baseload power plants and long-term charter agreements on vessels that really act like fixed income assets, which could be better suited for an investment profile with lower return thresholds. As Wes said, we believe that we can monetize over $900 million in assets between just the Nanook FSRU in Brazil and the Jamalco Power Plant in Jamaica and aim to complete those transactions in the coming months. With that, I'll turn the call back over to Wes.

Great. That's the end of the prepared marks. So, operator, let's open up for questions, please.

Ladies and gentlemen, if you would like to ask a question, please press star 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Alonso Guerrera-Garcia with Scotiabank.

Hey, guys. Good morning. Congrats on the zero parks, JV. I understand this opportunity is much more near term in regards to what your zero division was looking to accomplish previously. I wonder if you can elaborate on your first two projects there. Will both of those projects leverage that infrastructure at the Jefferson Terminal and Beaumont? And I guess what sort of line of sight do you have to additional opportunities beyond these two projects?

I'll let Ken answer specifically in a second. But the answer specifically is that they both leverage greatly the Augustine Terminal. So when you think of the renewables project, The focus for us right now is on feedstock, so finalizing feedstock arrangements and figuring out how to get them into the port. Obviously, what you have at this terminal are rail lines, pipelines, so there's truck lines. There's a lot of different modality forms that come into the terminal that bring stuff in, and then once you create your fuels, They need you to ship it out like any other fuel, whether it goes out in a pipeline or it goes out in a barge or it goes out in a truck. So it absolutely uses the infrastructures in place, and that's why it's such a critical part of it. In terms of the timing of it, Ken?

Yeah, I think we're confident by the end of the summer we'll be ready to go and be FID on both of these projects. You also asked, I think, what the pipeline was for additional projects. I mean, I would say right now we are evaluating – you know, in the double digits, you know, north of 10 individual projects. The first two are very near term, but we do expect to do several of these things over the next, you know, 6 to 12 months.

Yeah, and with, you know, clean and renewable fuels, less than 1% of the entire fuel spectrum, 99 is a long ways to go. So there's a very, very long list. You know, the power of proof of concept is very, very strong. So actually getting to FID, getting under construction, getting fully financed, is a huge milestone, a huge step for any company, but especially a company in a new sector like this. So we think that that actually will catalyze all kinds of incremental opportunities.

Got it. Great. And then maybe one on the terminal side. Notice that Southeast Asia is marked with first gas for September this year. Is that project under construction at this point? I guess what's left to do there? And any update on progress with Shannon?

On the Southeast Asia, we're making great progress on the agreements in place, which is why we haven't officially announced it, but that actually continues to move very well. The initial gas there will come from existing power plants, so that's why the timing is – in between final commitments and actually the first gas is a relatively short period because it's a very straight pull just to bring in gas for the first terminal. Then down the road, there's expected to be additional power built and a more permanent put in place. That's that. On the Shannon, Ireland, we continue to make great progress. I think that our goal is to file for permits here in the very near term. We think that the characteristics of that terminal will look quite similar to the terminals in Brazil and that it will be hooked directly into a very, very well-developed pipeline system. It will have the profile of higher volumes, such as we have expected to get in Brazil, lower margins, but on balance a very, very attractive proposition. So we don't have a final date of FID on that project in Ireland, and we won't have that until we actually file officially the permits, but I expect that that's coming in the coming months. Great. Thanks, guys. Go ahead.

And your next question comes from the line of Sean Morgan with Evercore.

Hey, Wes. Just a quick question on Brazil. When we look at the volume opportunity in Sergipe, which my understanding was Golar kind of had that up and running, it's obviously smaller than some of the opportunities you're seeing in places like Suape. And so, you know, for those of us that aren't that familiar with the Brazilian market and kind of the coastal cities and regions there, why is it that – that there's like a smaller footprint opportunity in the existing terminal? And what else can be done to sort of grow that? Because from my understanding, it's already somewhat established.

Yeah, that's a really good question. So big picture, you know, Brazil is roughly two-thirds of the population of the United States, uses about 5% as much natural gas. So the biggest of the big picture is we think the opportunity in the country is gigantic. It is serviced by two pipelines that run up and down the East Coast. They stop short of Bacarena. So the SWAP base or GP and Sadakan Arena are all on pipelines that are significant pipelines. And so to a large extent, it's just a geography question of, like, what user is closest to which of the terminals because they're somewhat ubiquitous with respect to, you know, where you connect on that. The volumes that we expect that are significant out of the pipelines are really anchored at either end by Swape and by Santa Catarina, but they could also be serviced from Sergipe as well, assuming the Sergipe terminal is then connected to the pipeline. It's about a 30-kilometer pipeline. pipeline pulls. It's a fairly short and straightforward pull from Sergipe into that pipeline, and then you can send gas either north or south, depending on what you want to do. With Sergipe itself specifically, right now the volumes are relatively low because the nature of the contract is one that does not really allow readily for merchant business. So we get a significant capacity payment. and then there's a 60-day window they have to provide notice for you in order to be dispatched. So it's really intended to be a backup power generation source, which I think really underutilizes the asset significantly. In a country that actually has significant needs of power production on a daily basis, We have 1.5 gigawatts of power that's expected to run a fairly small amount of the time. That's why the volumes are small there. So one of the very first things that we are doing with the technical teams there is evaluating what we would need to do to bring that into a merchant power production as well and thus generate a lot more volumes and a lot more revenue as a result. So there's a lot more on that to follow, but I think the Sergipe terminal is really two things. It's one is that 1.5 gigawatt, shiny new, beautiful power plant. And it's also a possible pipeline connection that would connect into the pipeline. It's the same pipeline that's hooked in at SwapA. So I don't know if that makes sense.

Yeah, no, that's helpful. And then on the last quarter, I think everyone's kind of aware that gas prices saw a pretty aggressive spike there at the end of, really at the start of the first quarter. So I get, you know, the gas costs kind of going up, but, you know, with the cost plus contracts in places like, you know, Puerto Rico and Jamaica, why don't we see, you know, the volumes are somewhat consistent quarter over quarter. So why don't we see a bigger bump in revenue as that gas pass through, you know, commensurate with what you saw in COGS?

Hey, Sean. I mean, the short answer is that we were already purchased for LNG prices. So we knew how much we needed and we bought it in. over the course of the end of 2020 until we get in the market seeking new LNG supply at all during Q1. We aren't really in Q2. We have maybe two cargoes max that we would need the rest of the year. So we have a pretty known cost of LNG for the remainder of 2021. And as we talked about before, we're largely purchased in the Caribbean Basin for 2022 plus. and have a little bit of exposure still in the Pacific Basin for 2022, which we intend to use FLNG to supply.

But your... We're protected as a company in that about 75%, about three-quarters of our contracts on the offtake side are also indexed to Henry Hub. So where we are indexed on the supply side, we're indexed on the other side of it. It does – I mean, it's interesting. It's a good question, though, in that, you know, gas prices definitely went higher both on LNG as well as on Henry Hub over the course of the – especially here in the last month or so. And it does really underscore this point of the FLNG. So to the extent we can really successfully deploy those assets on largely fixed-price gas, we have changed our, you know, our operational risk perspective dramatically. And also we then have the potential of offering more certain prices to our customers, which I think could have a huge impact in terms of some of our downstream, you know, uptake. So it's more to follow, but it's all good.

Okay, but just to clarify, some of those contracts on the revenue side are more Henry Hub-based, which we did see was kind of stable versus your COGS, which are bought somewhat in advance, but in the spot market on a deliberate LNG basis, there's going to be more variance there, and that's why we saw that kind of margin decrease a little bit in the quarter?

Well, as we've said, Henry Hub is a direct pass-through. So we buy at Henry Hub Plus, we sell at Henry Hub Plus, and the contract's in the Caribbean. You know, going forward, we would expect to be able – what we want to provide is clarity and visibility into our cost of LNG, which then gives you confidence in the margins that we're projecting.

But any change in margin really was just – that's just the timing. perspective, because there's not really a material risk factor for that at all, and it should really work itself out quarter over quarter.

That's right, and we forecasted the increase in LNG costs for Q1 versus what we experienced in Q4, and that is the biggest component of the margin change.

Okay, so maybe just a little volatility in the quarter there. All right. All right. Thanks, Chris.

And your next question comes from the line of Devin Ryan with J&P Securities.

Okay, great. Good morning, everyone. Maybe you want to start coming back to the JV with FTI. I'm sure I'll get some questions from investors since I covered that also. Just love to maybe get anything more you can provide around just the structure and split and how capital investments and economics will work in terms of what you will provide versus FTI. And then, you know, it sounds like there's a number of projects potentially behind the two that are about to go into FID. So, I'm just kind of curious around the development timeline more broadly and kind of thought of kind of what it would take for this business to be ready to be split off or taken public.

Yeah, well, the relationship with FTI is one that will be formalized during this period when we go FID in the first two projects. So the specific answer is that we'll have great clarity on that when it's finalized over the next 90 to 120 days. We signed an LOI with them that is conceptual and the concept would basically be they provide land and they provide access to their terminals and operational support and we provide all the technical and commercial activities and our estimate today is that the appropriate split of the company would be 75% for NFE, 25% for FTI. That's rough justice for what we think is being contributed to either side. Once that number is established and we have agreed on it, then the capital provided would basically flow commensurate with that. So if it was 75% with us and 25% for them and there was $100 of capital needed, you would split it along those lines. So that's something that is yet to be determined, but I expect the final numbers to be along those lines. We get great benefit by being associated with these terminals because we think that it's actually meaningful logistics and land and access to capital. They get great benefit from our operational and technical teams and commercial teams. And so the two of those, that's a fair transaction. We think that has the makings then of a public company that is a very, very exciting one. You know, talking earlier and looking at the different estimates of what we think this could be worth, again, when you look at the clean tech universe, there are very few examples of companies that are actually commercially viable, produce significant amounts of cash flow, have material growth prospects that are meaningful. I think that the valuation for this company could be extraordinary and could have a significant impact in terms of the overall valuation of ours. We'll have to see, but, I mean, this is not something that we are anticipating doing immediately. years from now, something we're anticipating doing months from now. So we'll have some clearer view of this, you know, by the end of the summer if that's the timeframe that actually ends up holding up. So with respect to the other projects, as Ken said, there are literally, you know, tens, dozens actually, of different projects we have looked at. I think that the fuel sector is the most obvious commercial activity. It's one where we can make money immediately, and we could have a big impact on the environment immediately. And so we've looked at a lot of different technologies. We've actually talked to hundreds and hundreds of different forms of ventures that have looked at this, and have concluded that fuels fit us very well. As an organization, again, through the old fortress hat, you know, Ken and others, they've made over $30 billion equity investments in transportation. So we have truly one of the best track records in the world in understanding the transportation market. So pretty much everything that uses fuel that moves, whether it's ships, trucks, trains, planes, chassis, ports, you name it, we've made material investments. We understand intimately what that is. And Ken is one of the senior partners of that business. It's been a very successful one. So transportation is something we know a lot about. Fuels is something we know a lot about. We have great assets to start with. And that, plus all the technology and the sustainability stuff from NFE, we think is a very potent combination. So that's the strategy for it. And I think these first two are meant to be representative of what we think the overall opportunity are. but they're not just science projects. They're actually meaningful projects that produce actual meaningful cash flow and profitability, and we think really put this company on a great track to being a very, very material, you know, green tech company.

Yeah, that's great, Keller West, and definitely interesting. Maybe just for the follow-up, kind of a high-level question. So, you know, I think the vertical integration with the fast LNG is incredibly disruptive, and Now that it's been out there for a couple of months in terms of when you guys started talking about this, I'm just curious kind of what the market reaction has been and how that maybe is impacting potential additional deal flow coming to NFE. And if there are other markets that are kind of interesting where kind of the arbitrage opportunity is most compelling. I'm just kind of curious that I'm sure this created some tension. in the market just given the kind of disruptive nature of it and want to just maybe get a little color on maybe additional opportunities that are coming about as a result of it?

Yeah, no, we have very active dialogue with a number of upstream providers, right? I'd say that especially the deep water solutions, which are going to be more technically challenging, are definitely the most lucrative, are the ones that long-term probably offer the most values. Because when you are far offshore and you're producing oil and there's associated gas with it, there's not really much to do with the gas. You have to build material amounts of infrastructure in a pipeline to take it to shore. It takes a lot of capital to do it. It takes a lot of time to do that. So that's the place where gas is re-injected or it's flared or it's really viewed as a liability, not an asset. That's clearly going to be where we're going to find the cheapest resource and have the biggest impact. But even in the onshore basins and from that map, you can see there's There's many of those around the world. There are similar situations that occur there as well where gas is either being flared or it is being re-injected or it's not commercialized, and that's where we really want to play a part. I think in the short term, I'm very focused, we're very focused on getting proof of concept of the infrastructure deployed. So we're looking at what we think are some kind of shorter cuts, some easier transactions that we think will be good representations of what the production might be. But there are many, many offshore, upstream opportunities for us to be a partner of, and we're talking to a number of the firms. It's also very good timing in that many of the oil majors, the independent oil companies, are looking to divest assets, are looking to commercialize them in some way, shape, or form. And so there's a lot more to come on that, but this is without a doubt my single biggest focus on a daily basis. And we're only showing a $2 as margin expansion for one of these projects. We think the upside could be materially higher than that. but that's a good representation. That's the 350 versus 550 kind of numbers that's in our financial projection on just the first of these. As I said, if you look at that one page, if you took all of our production, you replace it all with FLNG at $2, it generates a billion dollars incrementally. At $3 or $4, it's obviously even higher than that. So the impact to us on an earnings perspective is potentially very dramatic.

Yeah, I appreciate it. Okay, thanks, Wes. I'll leave it there.

And your next question comes from the line of Spiro Dunas with Credit Suisse.

Good morning, everybody. First question is a two-part question on zero parts. First part, can you talk a little bit about what your target customer base looks like and what your unique offering is? It seems like either at FTI or NFE, those kind of found an edge or would develop a better mount. I'm curious what that is here. And then on contract structure, Do you anticipate this being a fee-based business with long-term contracts similar to NFE or something else?

Yeah, hey, Spiro. I mean, target customer base in the renewable fuel space is just about everything. I mean, the products are immediately interchangeable and immediately replace any fuel. The technologies that where we're likely going to be announcing take multiple feedstocks and produce anything from renewable diesel, automotive gasoline, jet fuel. So it's a broad, broad customer base. I think for the For the blue ammonia, the biggest customer base is the shipping market. Ships today consume practically no renewable fuel. Over the next 20, 30 years, that's going to transition to over half of their fuel needs being from renewable sources, at least according to the IMO standards that are being implemented.

Got it. And then on contract structure, is this something that's fee-based and long-term?

Yeah. No, absolutely. I mean, fixed feedstock supply with guaranteed pricing and offtake. And to the degree we're selling some of the supply out to the fuels markets, you know, in the event. So some of that you are a price risk taker, but at the same time you can enter into, you know, a variety of arrangements to kind of effectively synthetically fix that price. So, yes, largely a fixed cash flow business with upside as you grow volumes.

Got it. Perfect. That's helpful, Ken. Second question, just on asset sales. Wes, you mentioned zeroing in on one soon. So, curious if you've got an updated sort of target amount or asset sale figure that you expect to sort of close on this year.

Yeah, we're actually quite close to finalizing the first of these, and the second one is in progress. I think that in our base case numbers, we think it's between $600 and $900 million in asset sales. So, there are substantial numbers, and You know, one of the things that we are going to work on is a way of representing it in our financial statements that are actually accurate, because the accounting standards for sale and leasebacks have changed dramatically in the last year or so, and we want to conform this and show. I mean, I have a very simple financial metric that I think of as the money. And when you get cash flow from these and you don't pay tax on them because they're a financing measure, it generates a significant amount of capital. How best to represent that? I mean, in the past, you know, the real estate businesses and whatnot have used, you know, measures like FFO or like, you know, cash available for distribution or whatever. And so we need to come up with something. I'm not a big fan of nonstandard accounting measures. And so that is one limiting factor. But by the same token, you're going to get a substantial amount of liquidity and cash flow from these asset sales. and they're going to be sold, I think, on balance at prices higher than what we paid or created them. And so representing that fairly is something that we need to do some real work on. But you'll see some gain. We think that at the end of the day our kind of base proceeds number up the middle for us is around $900 million. The basis of those assets that we are potentially selling is about $350 million less than that. It won't show up as an operating gain, nor will we pay tax on it, but it will actually show up as cash in the register. So we just have to figure out what the right way is with our accounting people and then work with you all so we make sure that we represent your models correctly.

Got it. That's helpful. One last quick clarifying question. I think in a previous question you were asked with respect to Zero Parks becoming a standalone company, were there any sort of specific major milestones you need to see before, I guess, starting that process? I don't know if it's a specific EBITDA amount you need to get to or maybe it's something sort of before that.

No, no. I expect that we will actually create a separate public company for the minute that we're FID on these two projects. So when Ken says we've got – 90 to 120 days is an aggressive but we think achievable goal given where we are today on both of these projects. And then we would look to have that be capitalized and separate it out immediately. And there's a number of different forms and ways that we could achieve that, but we actually are working on that now. So that's not something we will wait to do until then, but actually take that down the path so we end up with something. I think getting that as a standalone company, giving it its own identity, getting the shares directly into the hands of the shareholders, those are all the right objectives. and I'm very focused on doing that in the near term because we think that's the right thing to do.

Got it. Very helpful. Thanks for the time today, guys.

Your next question comes from the line of Ben Nolan with Stiefel.

Thanks. Hey, guys. I wanted to shift if I could to Brazil. You guys talked about FID on the three incremental projects there and appreciate that sort of your internal investment decision, but, uh, are there any, uh, hurdles or anything that needs to take place with respect to regulatory or commercial before, um, before you actually, you know, break ground and start spending money in that kind of thing?

No, it's actually, uh, you know, the, uh, we're very fortunate that the, The team that we inherited, we bought the company that Golar assembled, is incredibly capable. So we had the whole squad up here Monday and Tuesday, Ben, and basically what we're looking to do is marry up kind of our expertise and our operating experiences with what they have been doing. And I think on balance, I'm very, very pleased with what that group has accomplished thus far and kind of where we are. So, you know, Bacarena, we're EPCs. be signed in the next handful of days. That is actually very much in production. SWAP-A, it's like finalizing agreements with the port, moving the PPAs into SWAP-A and converting them from diesel to natural gas. That's something that obviously the government's very, very supportive of. Santa Catarina, we are deep in conversations there. That is something that is a very straightforward development, and we expect to sign EPC on that. in a very, very short time as well. So there are always permits and processes to go through. I'd say on balance, given our experiences, I would rate these very low where they are right now. And the timing to accomplish may appear to be aggressive when you look at Q1 of next year. But really you have to backtrack several years to get to where we came to on this. So these were years in the making, productively moved along, great technical teams at each one place. So I feel very confident that we're going to hit these timelines. And really the commercial side of it, Ben, we have just scratched the surface of. I mean, we just really have barely started to really go after and aggressively commercialize it and said, you know, I'll be in the north of Brazil on Sunday. And we've got, we think, some really, really interesting things there. We signed up the LOI on that first terminal with Norse Hydro, but that's the mouth of the Amazon River. The Amazon River has gigawatts of power. It's the highest power prices in Brazil. They are all heavy fuel oil and diesel based. So I think it's got potential economically to be tremendous. And you're also decarbonizing power in the Amazon. And that's winning, right? That's the best thing you can imagine. I think that the commercial activity will follow. I think you'll get a lot of updates in terms of announcements on things that are going on there. There's big commercial groups that are down there. But we know that as projects get closer to completion, that's when the commercial activity really ramps up. you know, effectively that's what happened to us in Mexico, right? So we're very, very close to now being completed in La Paz, and it's not really a surprise that that's actually what caused then the CFE showing up and signing a contract with us and looking at other opportunities there. So commercially this stuff is going to be, I think, extremely, extremely productive.

Okay, great. All right, and then – Shifting to the other side of the equation a little bit on the SLNG side as you're sort of getting closer to commercial agreements, are those, I'm curious, are those on a fixed gas price basis? And the reason I ask is a lot of places don't like to give up upside economics, especially developing markets don't like to give up upside economics. So are we thinking through a fixed price or is there sort of an X-linked part of that equation?

Yeah, you're 100% right. They don't, but of course, for the most part, they're very focused on the oil, right? A lot of these cases, associated gas is a byproduct of it. And I think that in the end, there will be a number of different structures that are used. My goal is to end up with as much certainty as possible on the gas price that's good for our core business and is good ultimately for our downstream customers. And so that's obviously the goal. But there could be, you know, many... of what that looks like. And probably at the end, there will be some combination where you'll have some fixed pricing, you'll have some indexation, but on balance, I think it'll tend more towards the fixed price side, just given the nature of the resource that we're extracting. Look, I think the other material factor for a lot of the resource extraction is we are not just a resource extracting company. We are a problem solver from the power side. because really all these countries, in some shape or form, want incremental gas, want incremental power onshore, and that's something we can also accommodate and do in a very, very competitive and expeditious way. So I think there's a lot more to come on this. I think the reality of having the first of these is something that we're now kind of really seeing the benefit of with our conversations, but we'll get the first one deployed, and hopefully there will be a lot more to follow. All right. Sounds good. I appreciate that. Thanks, Wes.

And your final question comes from the line of Craig Shear with Tuohy Brothers.

Good question. Wes, can you talk more about the technology used for carbon sequestration, and are you working with CHART on that as well?

No, not specifically working with anyone in particular. There are multiple technologies, some that sequester the carbon in terms of carbon capture and some that actually capture the carbon and convert it into usable products. It's the latter that I think is actually more relevant for our first project. Pretty interesting technologies continuing to emerge, but actually pretty straightforward process. But I think it's more likely, you know, on the carbon capture side to be a technology where we both capture the carbon and actually convert it into something that is usable and has market value.

Yeah, I mean, there's obviously a huge focus on carbon capture in Houston, Texas, right? So you talk to the big oil companies down there, there's a lot of interest in trying to be a part of it. I think the most straightforward use of it is to reflect it, use it underground and But I think that that really undersells what the benefit is. I mean, CO2 itself is a very, very useful product in pure form. You can create lots of products for it. There's lots of things that you can do with it. And so we're much more focused on that because we think that that's another incremental part of the value chain that you can capture. But there are many, many different – folks that are looking to participate in that, that have a lot of expertise in the upstream businesses that we think are good folks to talk to. So that's part of the process of going and finalizing that on the technology for our first plant here over the next 90 to 120 days.

Great. Thanks. And one last one. On FastLNG, Where are you in terms of procuring additional oil-filled infrastructure? Would the use of semi-submersibles involve any greater complexity than putting liquefaction atop jackups? And now that the market knows what you're using it for, is the pricing starting to change?

Well, the first two rigs we bought paid a total of $31 million to rigs that knew cost just over half a billion dollars. So we say pennies in the dollar is literally pennies in the dollar what they are, and there's With all that has happened in the world, there is an abundance of offshore infrastructure which is available at basically scrap values, and so that's a good thing. We focused on the jack-up rigs because we think that that's just an easier installation the first time around. As I said earlier, it probably is not the highest value when you compare it to some of the offshore opportunities, but it's still a substantial value, and so it's a good place to start. The semi-submersibles or the deepwater stuff, that's where I do believe that the greatest benefits will be, because that's the, as I've said many times, if you want to, you know, make a great fortune, find a big problem and solve it, and the offshore gas is a big problem. I mean, offshore development focuses on the oil, the gas, and the infrastructure that is needed to deal with that takes a lot of capital, which is not that available, and a lot of time. And so this is a big solution for it. But our technical team, which is a very, very capable one, they think that the offshore installation very much will follow the same pattern. So the modularization, if that's a word, I might have made that up, but I mean, modularizing the liquefication, gas treatment, all those things, and making them fit into smaller spaces. That's my lay description for what these guys actually do in a very, very specific way. That works the same on the deck of a semi-submarine as it does on the deck of a jack-up rig. So a lot of those things we think. Now, obviously, mooring systems, how it all connects and whatnot, there's different things you have to account for, but we very much feel like the application will work in both shallower as well as deeper water eventually. Thank you.

I would now like to turn the call over to Wes Edens for closing remarks.

Great. Well, thanks everyone for dialing in this morning. There's a lot going on and it's fun to have a chance to update you. And as I mentioned earlier, I think we're going to have a road trip sometime this summer. And I think it'll be fun to get people and give them a chance to see some of our operations in business. I mean, we're We're a busy operating company today that is transitioning from this development company to an operating company. The pace of that is going to intensify as we now open these new terminals in Nicaragua and in Mexico. And I think it would be a great opportunity to get people in front of it and have a chance to interact with our operational folks and see what's going on. We're very, very happy with kind of what is going on down there. It would be great to share it. And I think there's a lot more to follow on all these different fronts. But thanks very much for your time.

This does conclude today's call. You may now disconnect your lines.