New Fortress Energy Inc.

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 speaker's presentation, there will be a question and answer session. To ask a question during the session, you need to press star 1 on your telephone keypad. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. 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 Genta, our chief financial officer, and Andrew Deedy, managing director leading our Brazil efforts. Throughout the call, 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 would 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. Before we get into that, maybe we'll 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. Our business is to do so while addressing 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 a level set, is a 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 investment 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 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 that we're going to show now tremendous organic growth across the portfolio in the months to come. Second of all, earlier this year we made the decision to introduce FLNG into our portfolio and go FID on our first project earlier back in March. I believe that the path that we're following in FLNG FLNG will change the liquification of LNG around the world and is already doing so. Faster and cheaper liquefier construction combined with access to stranded gas is a powerful combination. The technical solution that we have is on time and on budget. Cheaper feedstock not only represents a big cost advantage to our business, but also provides the host countries a path to develop homegrown power and economic activity that they desperately need. It's a big win for both sides. It's a huge step for us as a company. Lastly, true energy transition long-term means clean fuels. Natural gas is much better than oil and diesel. It's cheaper. It's much cleaner. But the real goal is clean hydrogen-based fuels, hydrogen, ammonia, methanol, et cetera. The first part of that journey for us is to identify the problem, which we have, and then coming up with a plan to solve it. It's crystal clear to me what the problem is and what the solution needs to be, and now it's simply a matter of executing it. The first industry that you're likely to see decarbonized in a material way is the shipping industry, and it's already happening. Alternative fuels make up just 3% of the fleet in the water today, yet make up over 30% of the ships being built in shipyards. The first fuel will be LNG, soon to be followed by hydrogen-based fuels. This represents a gigantic opportunity, and our goal is to be a big part of the solution, and we have the terminals and infrastructure to be a part of that. So it's been a very good start to the year, so with that, now let's turn to the quarter itself and start with page number four. We have several significant highlights to report this quarter, but it all starts with earnings. Significant increases in Q2 2021 segment operating margins with further increases expected in Q3. If you look at page number five, not to skip around, we actually lay out by quarters over the last year and then what we expect this year to happen. And you can see that we are making material strides now and actually transforming from a development company into an operating company. Q2 last year, $15 million in operating margin. Q2 this year, $130 million. Our expectation is approximately $210 million for Q3 and $170 million in Q4. Those are expectations based on what we see right now. Given that we're roughly halfway through Q3, I feel very good about the forecast that we've got there. We'll talk about this more in detail, but you can see clearly the benefits now of not only the terminals themselves coming online, but also the diversification of income sources to go from terminal operations to ships to third-party contracts to gas sales, merchant power operations, et cetera. Our business is diversifying by the day and is growing materially. My expectation for next year is that we'll be over $1 billion in operating margin, and 2023, $1.25 billion, And this is all without any incremental benefit from FLNG, any incremental benefit from Ireland, any material economic benefit from the organic growth that I expect to see across the portfolio. So we really are an inflection point as a company from an earnings perspective, and I think there's much more on that to come. Number two, the big story for the quarter and for the year thus far is really gas. And I'll talk about that in some detail. But our gas position, bottom line today, is essentially flat after the portfolio purchases we've made this year. So... So I say we make a lot of bad decisions around here, but we make a few good ones. And the decision to basically take the volatility out of our business has been a very good one. At a time in the market where prices have increased by roughly 50% in the last handful of months, we have essentially very little to no volatility in our business. And, in fact, that volatility now creates gas and merchant power opportunities, and Andrew will talk about some of the things we've seen down in Brazil about that in just a second. Okay. Three is liquidity. We expect our projects to be self-funded between financing and asset sales. Chris will detail that in his section, but the bottom line is everything that we have committed to, we can pay for ourselves. We committed on the first leg of our Jamalco sale leaseback, which funded in the last couple of days. We expect the ship financing to fund later this quarter, but we're very much on track from a liquidity standpoint to pay for everything we've done and be internally financed, which, of course, is my goal. And last, what I already mentioned, the FAST LNG, we're making significant progress in the technical work. We're on time and on budget. We have a lot to talk about there. The gas sourcing has been very productive, and we expect to announce our gas source in the next 60 to 90 days. So with that, let's flip to page number six. And just by way of recap, let's just talk about where we got to today. Over the last six years, we've been largely focused on development. And today, many of the projects are either completed or are nearing completions. And as I said, we're very focused now on operations and organic growth. 2016, almost to the day, was the first contract that we signed. So in 2015, where we signed our first contract with JPS, the utility in Jamaica. In 2016, we had one LNG import facility, operating margins of negative $7 million, and Today, this year, full year, we expect six terminals up and operating by the end of the year for a total margin of $550 million. 2022, 11 terminals, a billion dollars. We've invested over $7 billion in these projects over the years. We've made enormous investments of both time and money and are now really at the point where we can start to see the economic benefit of all those assets. When you look at page number seven, You can see this is the map that shows where the assets are. We obviously have a very significant presence in the Caribbean, in Mexico, in Central America, and South America. Our first investment in Asia, in Colombo, Sri Lanka. and there's a handful of other markets which we are actually exploring. But I'd say that the focus of the organization has shifted less from new markets, although there's a handful of things that are material that I expect to show up here in the next month or two, but less from new markets and more just mining the operations that we've got in our operations around the globe right now. Page 8, you know, the path ahead is clear, and I already mentioned this. Energy poverty is very, very real. This chart on the left-hand side shows you this very graphically. Electricity consumption in the United States, 11,500 kilowatts per person. Nicaragua, at the bottom of the scale, 552. The gap creates tremendous disparities in terms of both health and economics and is one that can be addressed by exactly the activities that we have. Number two, though, is the sustainability in the energy transition is a must. Fifty-one billion tons of greenhouse gases are emitted every year. You know, enormous weather events happening daily. It's no surprise that the entire world has woken up to this is an issue of our generation. It's something to be addressed today. Just this morning, Exxon announced that they intend to be carbon-free by 2050. This is just another one in a very long string of decarbonizing events by different companies announcing over the years, and we think it's only going to accelerate from here. That creates not just huge problems but huge opportunities for companies like ours. So look at the gas briefly, and again, I mentioned this already, so flip to page 11. What have we done since last quarter? We brought in about 50 cargoes and are now fully committed for the demand that we have on the books for the next six years. The chart on the left-hand side of the table shows you by year what our cargoes are that we need in order to satisfy our customer needs and what we bought in, and you can see that we're essentially flat. The average cost of our LNG portfolio right now is Henry Hub times 115 plus 256, so a material discount to where the market is today. We don't intend the LNG book to be a trading book, but are very happy to have reduced our volatility in this regard and be matched and have done so at a price that's materially below where the market is, and that protects us from LNG price volatility going forward. Briefly, the next section, and then I'll turn it over to Andrew to talk about Brazil, but let's just touch on the FLNG. So page 13, this is the cartoon that I've shown you before that shows basically how this works. And really, the point of it is really twofold. One is to take existing marine infrastructure and modify it so that it can actually be used for an LNG liquefier. In our case, what we've done is we've bought a couple of jack-up rigs, Those are being cleaned off of the equipment that we don't need, repopulated the equipment that we have modularized and have made fit on there, and they'll be deployed offshore. That allows us to do two things. It allows liquefaction of stranded offshore gas and delivers a technical solution that's faster and cheaper. How big is the opportunity on page 14? The answer is it's a gigantic one. There's stranded gas all over the world in different geographies. There's only seven FLNGs that are actually operational or under development today, representing less than 3% of what we think are the total amount of the market. So there is a huge, huge need for access to the solution for these stranded fields, and we think that we have the right tool for the job. Page 15, you know, we were talking about this the other day, and I was reflecting back on another business which I was involved in many years ago. Back in our private equity days, we made an investment in a modular housing company maybe 20-something years ago. And I spent a bunch of time looking at the production of the modular housing, and what I discovered was that in the process of making a house inside of a factory, there's two things that happen. A, it happened a lot faster than if you built it out in the field, and B, it happened a lot cheaper. So modular housing was 20% cost savings, 40% to 50% savings in cost. And there's a lot of parallels between that and what we're doing here because essentially we're building a factory for liquid fires that we're bringing the gear to and installing as opposed to stick building it in the field. Traditional liquefaction costs $600 million to $700 million a ton, takes 45 years to complete, and is hard. When you actually have to bring all the technical people to the far corners of the world where a lot of these gas fields are, it's very hard to get welders, steel workers, cryogenic engineers, all the technical people that you need on site and in production there. Building it in a shipyard in Corpus Christi, Texas, which is where our first one is getting built, allows us to access all that equipment high-quality talent in the Gulf Coast do so both faster and much cheaper. So we think that the potential savings are 30% to 40%. We think the savings in time is even greater, 75%. So cheaper, faster, and more reliable. You can see on page 16 where we are. These are the first two jack-up rigs that we bought. I think we paid just over $31 million for the two of them, so basically bought them for scrap purposes. Those are both in the shipyard now at Kiewit. I'll be down there in two weeks going through them firsthand. But basically the process is to strip off what is there, reinstall and assemble what we've got, and we think that our schedule of being ready to install this if the second half of next year is very much on the path. We'll start now with Dr. Andrew Deedy, who runs the Brazil stuff.

Andrew. Thanks, Wes. Hey, everyone. Great to talk with you again, and I'm 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 and our views kind of on our macro thesis in Brazil and how some of the current events playing out in Brazil around power and gas shortages are 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 grid in Brazil is basically underpinned by hydro. However you measure it, it's about 65% to 75% hydro power. There's 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 into 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 shift basically all the domestic gas production to power, and that leads to gas shortages, which we're seeing in the second box here. And for NFE, this situation, which has become really acute in the last few months in Brazil – leaves a significant opportunity, and we'll take you through that. So page 19 gives a little bit more data and information on what we're seeing. So on the left side, you can see the data here on kind of what I'm talking about, where in 2021, we're actually 50% below the 20-year average for the water inflows in the reservoirs in Brazil. And almost more importantly, what we've seen is really a sustained downward trend. So it's pretty normal that in Brazil you would see fluctuation on the hydro data year over year, and certainly, like, seasonally. But what we're not used to seeing is this kind of sustained downward trend. So typical management practices would be, you know, reservoir management or, you know, compensating with some renewable fuels and kind of thermal dispatchable power. But when you have this kind of secular downward trend on hydro inflows, you end up relying a lot more on that thermal generation, which isn't really built to sustain the system. And so on the right side, you see the consequence of that, which is in the last month, we've seen spot power prices that are 10 times above the 20-year average. And that's caused by having to turn on not only all the gas-fired power plants, but to turn on the sort of older, inefficient, much more expensive diesel and HFO-fired power plants as well. So what's that mean on the gas side? On page 20, we wanted to distill down the kind of simple situations happening on the left side of this page. So the blue box is really the domestic gas demand, if you assume there's no demand for thermal power. The gold bar is basically the domestic gas supply. So Even in kind of a no thermal power demand situation, you still rely on a bit of imports, which come from Bolivia or come from LNG imports that Petrobras has. And then what happens is when you fire all of the thermal power plants, you can actually increase the gas demand by over 65%. It's about 11 MTPA or 18 million gallons a day. And so you go from kind of needing a little bit of imports to cover your supply-demand balance to needing a ton of imports. And in a situation where you have Bolivian gas declining, you have really high LNG prices in the spot market, and, frankly, you have a limited infrastructure build. Out of the Petrobras three LNG terminals today, only one of those is operating. Actually being able to import this amount of gas is very, very difficult. And what that means is for us, you know, as an LNG provider not relying on domestic gas, you know, we're really of extreme value to the system. And we're just seeing massive shortfalls today. So on the right side of page 20, it kind of follows the same pattern we've been talking about. So we just tried to pick out two things from the press that kind of fit on the same timeline we've been talking about. So first, a lot of report on really high spot prices and the notice that the Brazil system is kind of not set up to deal with the current crisis. And then secondly, we have some big announcements and a very big one yesterday about gas shortages. So Petrobras is now announcing that they won't be able to renew gas supply agreements to the state distribution companies in the Northeast, which is really the area around our SWAPE terminal. And so we're seeing the same trend play out in the press, where first we notice high power prices, and that leads to significant gas shortages. So on page 21, you know, the big question, obviously, is how does that translate into opportunity for NFE, and what are we doing about it? And so on the power side, we have our, you know, 1.5 gigawatts per GP power plant up and running today, receiving capacity payments, and dispatching at 100 percent of availability. Given the situation we're talking about, so GPs, you know, fully dispatching and receiving payments, you know, for emergency security or in-merit dispatch as required. We have the SWAP-A power plant, 288 megawatts. By our analysis, it's actually the next thermal power plant in Brazil that can turn on to the fastest in Q4 2022. So, you know, of strategic national interest, and we're seeing that in our relationship with the regulators. And then we have our 605-megawatt Barcarina power plant expected online date Q1 2025. On the gas side, our Barcarina LNG terminal EPC contract is signed and will be online in Q1. Our Santa Catarina LNG terminal EPC contract is signed, also will be online in Q1. And then we've signed an MOU with Norris Hydro at our Barcarina terminal for 1 million gallons a day, which we're actively negotiating and hope to finalize very soon. And then we're announcing the signing of an agreement with an industrial customer at the Swape terminal for 1.4 million gallons a day. And so those two agreements, I think, really just are starting to show the value proposition our terminals have for gas supply in the country, both due to shortages in the case of Swape and Santa Catarina, and in Bacarena, where you don't have any gas today and we're really the sole supplier. And then we have tremendous momentum in our off-grid business, so ISO container business, And we've signed three exciting agreements for us. So at Santa Catarina, we have two agreements signed, one with SC Gas, who's the state distribution company in Santa Catarina, 66,000 gallons a day. And then we have a pulp and paper customer, 50,000 gallons a day, also from the Santa Catarina terminal. And then we've signed an important partnership with Gasto Parra, who's the distribution company for gas in our Bacarena terminal, 88,000 gallons a day with a lot of room to grow as we continue to invest in infrastructure with them. and increase the gas footprint in the state. And so what that really means is on the right side, we're sort of re-underwriting everything we've seen in Brazil. And so in April when we closed, I think we announced a $410 million number in terms of our opportunity in Brazil. And as we look more at that number, we're really raising that base case to $525 million. And that includes everything we're talking about on the power side, as well as gas sales from our terminals and then our off-grid business. We're seeing real momentum across all those businesses, given the sort of underlying macro situation we're seeing. And then we're excited about the upside in those businesses as well. We think especially on the terminal side, in the building of new power, expansion power, emergency power. And then we think the most upside opportunity might honestly be in the off-grid business, where not only in the Bacarena terminal, where we're the sole importer of gas, but really in the other terminals where we're connected to the coastal pipeline system, But frankly, large municipalities and industrial customers who are just off the coast or not and are very hungry for gas, and we're bringing kind of knowledge and know-how from our other operations to really start that sort of off-grade ISO container business in Brazil. So the demand and momentum there is just tremendous for us, and we're really excited about what our team has been able to do there. So we see $225 million of further upside for a total opportunity of $750 million. So on page 22, you know, we sat around and tried to kind of think about the main messages 120 days on from the acquisition of Hygo, which closed April 15th, so a little less than 120 days. And we have three kind of main takeaways as we sort of look back on our thesis at the time of the acquisition and where we are today. So first is, you know, we believed in a very high-volume gas supply opportunity in Brazil, a country of over 200 million people. with limited infrastructure build-out and a real need for energy. And we're also seeing strong margins in that business. So, you know, a couple of facts sort of conspire towards that. One is the passing of the new gas law in Brazil, which is basically accelerating the reduction in Petrobras' monopoly on gas supply, as well as, you know, sort of overarching macro trends on commodities. We really see a strong margin business as well on the pipelines. Two is, you know, one of our theses for buying Hygo was that we saw strategic terminals but also terminals that were in advanced stage of development. So we're really benefiting from great permitting work that the Hygo team has done to get us in a place to actually turn these terminals on in Q1 2022 for Santa Catarina and Bacarena and in the first half of 2022 for Swape. So, you know, we've also, you know, made great strides in terms of quickly getting those EPC contracts signed. and really excited about our progress on the construction side. And then third is, you know, continuing to hit on our small-scale and off-grid opportunities. I think this is a business in Brazil that's going to continue to grow. Diesel prices in Brazil are $18 to $22 per MMBTU. We have an amazing value proposition. We have a really great team in place. And we're seeing, you know, really small-scale partnerships across our terminals that are going to be really great for us. And we're seeing, frankly, really large off-grid opportunities for, large industrial companies that don't have gas access today and can really benefit from it. So those are kind of our three takeaways on re-underwriting the business and how we're seeing it, and I look forward to any other questions we have as we make progress in Brazil. Thanks, Wes.

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 HIGO 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 and 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 segments. The second major change about the way our financials are reported is a result of the accounting treatment for entities that we do not effectively control 100%. For NFE, this is the Sergipe Power Plant, which we own with our Brazilian partner, and the HILI, which we co-own with Golar. On the income statement, our share of operating income from Sergipe and HILI will be seen in the income from equity method investments. However, if you look at the segment measures in the MD&A, we're showing our 50% share of this revenue and operating margin contribution to their respective segments. Turning your attention to the financial performance for Q2, we sold an average of just under 1.5 million gallons per day for the quarter and earned a revenue of $224 million. Starting first with the terminals and infrastructure segment, the operating margin was $55 million, which is up $12 million from the prior quarter. On the ship segment, we had quarterly operating margin of $76 million, which is slightly above what we were expecting when we made the acquisitions. As you take a look at the balance sheet, we added about $2.3 billion of debt, which is comprised of $1.7 that was raised at the NFE corporate level and approximately $660 million that was assumed as a result of the transactions. The bulk of this is in the form of sale leasebacks, which we further outlined in the notes to the financials in the 10-Q. On slide 25, this is an important page to convey the SG&A costs that we incur in running our business and how those are broken down between core operations and growth. Just to orientate everyone, the bottom line on this page would be what ties to total SG&A plus transaction integration expense running through the financial statements. Above, we've broken this down into three key categories. First, this non-capitalizable line includes a variety of items that we would ordinarily be able to capitalize if we had gone ahead and taken or declared FID. This includes things like engineering, consulting, or permitting expenses that would occur prior to our formal decision to proceed, which would result in the capitalization of costs from that point forward. This line also includes our transaction and integration expense for things like M&A transactions or non-recurring corporate reorganizations, which obviously was elevated during Q2 on account of the mergers. Second, and most importantly, this core SG&A includes costs that are unavoidable and essential to running our company day-to-day. This includes a portion of our in-office employees, benefits, rents, some insurances, audit, and professional fees. Third, growth SG&A includes the costs that are directly attributable to our efforts to grow and expand both at current terminals and in new ones. So this is largely sales, development, salaries, some professional fees like legal and engineering, and the bulk of our travel expenses. The takeaway here is that if we truly just were running out the operations of the core business, this can be done for around $40 million per year. However, our gross SG&A reflects our choosing to invest in opportunities that we believe will result in increased cash flows over time. If you turn to the next slide, this will be pretty familiar to you if you listened to our investor call a couple of weeks ago, but the headline truly speaks for itself. The capital for all of our projects under construction or under development are expected to be self-funded through a combination of cash flows from operations, ship financing that we are currently in the market with, and selected asset sales. The uses on the left side of the page total $1.6 billion and include the cost to complete construction on all of our terminals, including the three in Brazil, Ireland, Sri Lanka, and the remaining cost for our first fast LNG asset. Turning to the sources quickly, we recently put in place a $75 million letter of credit facility that allows us to free up restricted cash, and we will use the facility to more effectively manage working capital for things like LNG cargo purchases. Our first asset-level financing, the sale-lease-back transaction of our Jamalco power plant, is progressing very well, with approximately $100 million funded to date, and the balance expected to be committed and funded by the end of the month. On the SHIP financing facility, we are currently in the market with $300 million committed and strong interest in the balance. This facility would be secured by nine vessels, has a three-year term, and is priced at L plus 300. And finally, we have a strong portfolio of assets with long-term, stable cash flows that would be ideal for asset-level financing or sale leasebacks. We put $400 million here to level the sources and uses, but we believe that we have over $2 billion of possible proceeds against these assets. With that, I'll turn the call back over to Wes.

Great. Thanks. So the last section I put in here is one on evaluation. And maybe even before I get to that, just to kind of summarize the half point of the year. I think that this is a – we are – 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 roll back to the beginning of the year and I think of the decisions that we've 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, and we paid about $3 billion for it. Now, we had late-stage developments in Sedecan Arena, in Bacarena, and in Swape, but we still were 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 EPC on Santa Catarina and Bacarena, and Swape is right behind. As Andrew said, we'll sign next week long-term commercial contracts that approximately double the size of our commercial contracts and volumes as a company. And this is barely scratching the surface. Brazil is a huge market that has significant challenges in the energy front, and that presents massive organic opportunities for us. As Andrew said, the current re-underwriting investment is materially higher than we underwrote in the base case, and our upside could be double that or more. This is a very, very good investment. It's a very large one, so we feel great about that. Second, the decision to buy the ships in large part was a defensive one. We know that we need ships and we need FSRUs to complete our terminals, And I was concerned about the pricing on the market getting away from us. In hindsight, that also looks like a very good decision. Shipping prices and shipping costs are up 25% or more across the board. Timelines to get new assets are extended. And we basically bought the ships and the FSRUs that we needed at the time that we need them. We get income from those that are being used by third parties right now. Eventually, as Chris said, those will be integrated into our terminals and But we bought very high-quality assets, and we did so in a way that both prevented us from the downside of actually having to go out in the market and contract or buy in these assets and do so in kind of one fell swoop. So these two decisions together, I think, are both very good ones. In terms of valuation, I've got a very, very simple way of looking at it. We have spent, as I said, a little over $7 billion to get to where we are today. So when you look at our expected margin for next year of $1 billion, One divided by seven is about 15%. So what you're building essentially is irreplaceable energy infrastructure assets in these markets. Your development yield next year is 15%. So it's a very, very high yield relative to the value of those assets today. And we're just beginning. At $1.25 billion in margin, that's about an 18% development yield. At $2 billion, it's at 28%. So you're building assets, and you're buying into the market today at a huge discount in terms of what the capital value of those assets would be, assuming nothing else happens. Assuming nothing else happens on the FOMG side, assuming nothing else happens on the energy transition side. As I said, energy transition is one of the most powerful forces in the world right now. The weather events, the climate change, the focus on people on carbon taxing to force decarbonization across industries is a massive, massive, massive impetus. And we are in the forefront of that. And unlike most of the other companies in the sector, we actually make a lot of money. And so we're just now at the point in time where you can see material amounts of economics roll to the bottom line. So from a year ago at 15 million to today at 130 million to next quarter at 200 plus million, next year at a billion dollars. We're right now just starting to actually turn the assets that we have. I was joking with someone the other day, I feel like the six-year overnight sensation. Maybe it's the seventh year that really matters. Seventh year for the bucks ended up being a pretty good one. So maybe the seventh year that's ahead of us and this is going to be equally good. So from a valuation standpoint, I think it speaks for itself. I mean, in any metric as far as I'm concerned, These are vastly undervalued. And now as we execute and continue to grow the business, I think we'll present some great opportunities for shareholders in the future. So with that, I'd like to turn it over to the operator. I'm happy to open it for questions.

At this time, to ask a question, press star then the number one on your telephone keypad. Your first question comes from Spiro Dunas, Credit Suisse.

Good morning, everybody. Wes, first one for you. The slides pointed to a transition occurring here, just sort of between coming from a development company to an operating company. It feels like this is probably the first quarter where we haven't really seen a sort of new big initiative announced. So I'm curious, is this kind of the pivot now towards full bore execution on the project in front of you and kind of what you see is what you get?

No. I mean, we actually made an announcement this quarter that we actually have an agreement in Sri Lanka, which is a island of 20 million people that doesn't have any natural gas lines. 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, you know, 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 opportunities, getting permits and building something, number one. Number two is then to commercialize that, and that's what we're right in the thick of 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, that would be a good field trip 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're works of beauty. And they're 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, you know, we're going to go from a development company to a commercial company to an operating company. We're in the thick of it right now. And so at the end of the day, it'll be dozens of terminals and dozens of ships and, hundreds if not thousands of people kind of running around. I've had quite a bit of operating experience across the years in many, many different businesses. This is a very, very simple one to operate because the nature of what we do is not that complicated. It's like any good operating business. The question is, can you do it cost efficiently and can you do it safely in all these different markets around the world? So it is a pivot point for the company to go from purely focused on developing and operating, it doesn't mean that we're not going to continue to develop new markets. But I think that with what we have right now, I think there's so much value in the ground in these different markets that we think that simply mining what we've got right now is a very, very productive thing to do. But, no, you should expect, I mean, I expect that we'll have at least two or three new countries that will open up for us that are material between now and the end of the year, based on what we see right now. But it's simply not the focal point of a call like this when we've got so many other things to talk about.

Got it. Understood. That's helpful. And if you could just to tag along that, just in terms of the countries, you know, obviously you're now in Asia. So if you assume that at least one of those two or three is also going to be in Asia, I'm 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 in the ground. 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 end point of the commercial transactions. It's the beginning point of them. And each of these markets, as I said, you're going to see More transition of fuels and power plants in places like Puerto Rico and Mexico, absolutely. You're going to see significant bunkering. I mean, it's not in any of your notes. 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. I 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, you know, whether you or other analysts, I hear that 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 that Andrew was talking about in Brazil, those developments for the most part started in 2015 and 16. So they're right now at the point of turning on, and the commercial opportunities are just beginning. And so I think it's, you know, at the end of the day, you know, it is what it is, and the numbers will speak for themselves, but I think that, you know, the value, the commercial value of these terminals is gigantic because you can, as I said, the infrastructure business, it's quite simple. If you build something for one reason and they don't use it, you lose all your money. So you build a toll road that nobody drives on, that's a bad infrastructure investment. If you build an infrastructure investment that not only one person uses, but two people use, or three, or God forbid, four or five, you make all the money. And each one of these infrastructure assets now has the ability to bring natural gas as a replacement fuel, which is both economically cheaper, it's cleaner, it's a much better alternative to diesel and heavy fuel oil in all these countries. And it's just now a matter of doing the work to do it. And in a place like Brazil, yes, it's a big competitive market. 95% of the cities in Brazil are not on natural gas. And we'll have four terminals by this time next year that actually bring it from north to south. You know, I'm not frustrated by it because I think at the end of the day, it'll take care of itself. But I just think that from my perspective on it is that building these assets is incredibly valuable. And you're just starting to see and barely scratch the surface, frankly, of what the organic growth is going to come from.

Yeah, fair point. No pushback. That's a lot of utilization up there in the system. Sorry, second one for me, and I'll be quick about it. Just in terms of capex and timing, this lines up 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 uses have to go out, any sort of gap that could materialize there, and then how you'd plug it if that happens?

Hey, Spiro. It's Chris. 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 nine to 18 months, depending on the project, the geography, the greenfield versus something with existing infrastructure, et cetera. 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 with about 50% being spent in the back half of the development timeline. 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. Helpful, Chris. Thanks, Chris. Thanks, Wes. You bet. Thank you.

Your next question comes from Alonzo 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 has allowed for new entrants. And from your slides here, it looks like you're participating in a couple of public tenders for swapping Seneca Arena. 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 project-centered 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, you know, the big picture in Brazil is that you've got a massive country. It has been served by monopoly, by Petrobras, historically, but it has actually really changed. And the other, you know, 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 so they shift those gas supplies on shore 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 dynamic. 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 a long ways from being realized. Those are substantial competitive or just industrial challenges in bringing it onshore. It's very, very expensive to do so. I think long-term we believe that there will be gas that comes in from offshore, but it's not going to be anytime soon. And so what you've 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, here we've got third-party, price-certain, time-certain contracts to be developed, and we have massive 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 off-the-grid opportunities, both at power plants and industrial customers, up and down Brazil is really gigantic.

Yeah, it's a great and layered question because we're doing so much across power, gas, soft grid, et cetera. But let me try to quickly hit a couple 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 competition. 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 Bacaran is the sole import point of gas in the northwest, mouth of the Amazon Basin. Swape is at the end of the kind of coastal pipeline system in the northeast 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 we've got to think about it as a head start, and we've also got to realize, you know, 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 costs, high molecule costs, et cetera. 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, you know, basically charging people kind of various fees that don't need to be there, total lack of flexibility. And so we have an offer in the market that I think is better from that perspective and also from a price perspective that You know, it's less volatile. I think one of the trends we're seeing is Henry Hub pricing, frankly, is less volatile on the commodity side and is overall has more of a fixed portion than Brent-based pricing, which has been kind of a difficult thing in Brazil for consumers. And then we also bring the small-scale opportunity. So if you think about how we work with some of these distribution companies, which are going to be really big pipeline volumes, We go in there and we work on both the off-grid side with them where we're going to provide, you know, gas to, you know, municipalities that don't have it today in their state and also work through on large pipeline volumes. So we kind of have a differentiated offering on that side. And then the last quick thing I would say is, you know, we're hyper-focused on competition. And I think, you know, we have that mapped and we'd love to talk more about it. But we also are just seeing kind of a, you know, when you look at the demand side in Brazil, I think one of the things realized is it's supply constrained. And so the other thing we've realized just in our travels and experiences is the amount of overall stranded gas, I think, is probably undercounted, meaning that, you know, demand that would be there if there was supply. And it's a hard thing to kind of put numbers around easily or to present in kind of an earnings deck. But our experience is that, you know, there's a tremendous amount of more demand that we think will come from having gas in these strategic places.

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 $1.50 to $2.50 per MBT margins for Brazil. And it sounds now that you're, I mean, you are advancing on the commercial side here with that 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 about 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 and some of the higher margin versus the on-the-pipelines, you know, 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. 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 what 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. I appreciate it. Good time.

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 Haley, 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 train is not going to be fully utilized before the contract expires. So as you sort of look at potential EMP partners for these shallow field well developments, how are you sort of weighing toning agreements versus just control of the EMP and then having like the ability to sort of set the pace of development of those assets?

Well, I think the Healy is a great learning experience, right? So it's certainly good to see it firsthand and see how well it operates. I think that 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 equipment. 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 currently producing oil field that has got a lot of associated gas that they are flaring or reinjecting or not using. So that's one where we would be an off-take partner with them, and we would liquefy and actually monetize that. And so I think there's a special place in heaven 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, you know, 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, you know, power plants onshore. The gas is cheap enough. I do think on the hydrogen side... You know, cheap feedstock gas is what's going to lead to hydrogen and ammonia production, and it's quite possible you may be 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 that the key thing is own 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, we'll make a decision on one of them here in the fairly short term.

Okay. And it's good to see that the former GMOP assets are contributing, I guess, really at the revenue level and at the 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 for at least existing plans?

Well, I think, you know, we'll be reporting this in the third quarter results, but I already know what some of the results are because we're in the middle of the third quarter. But, you know, what's happened for the first time is you see really the benefits of having an integrated gas and ship empower business and allows you to move, you know, into different transactions. So, for example, the high prices in gas in the world, the shortages of gas have led to, you know, some very, very high prices in 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 don't need to We're on the second quarter results, not the third quarter results. But there's 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 costs. But also there is a material upside to then being able to take advantage of a situation where somebody may need some gas in a situation if you have both the gas and you have The transportation to get it there, you can take advantage of that. There's some very tangible, very specific things there that we'll talk about, but it's really good. I think 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 side 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 I appreciate you guys squeezing me in here. I just want to talk a little bit more about Brazil, I guess, to start, and really appreciate the update on the power challenges and how that's accelerating the opportunity for NFE. I'm curious how long the contracts are that you're signing, how much more infrastructure outside of what NFE is doing is being kind of complicated and brought online, and just what whether some of the solutions we're looking at are to bridge the gap versus your real kind of long-term kind of operating opportunities.

Hey, thanks for the question. You know, 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, you know, 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, you know, 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 terms. And I think one of the things we feel like from a value proposition standpoint 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, you know, I think you're seeing kind of somewhere in the middle, 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. Bucarena, like I think we said, is always going to look a little bit more like the rest of the NFT 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, you know, it's a little bit shorter, but I still think we're – expressing our value in having some longer term than they have today.

Yeah, I mean, the first two big contracts, though, one is a five-year and one is a 15-year, and these are for a million-plus gallons. I mean, so these are very significant gallons. Andrew gives the right color. The pipeline stuff is likely to be shorter, longer than what a current 10-year is, but shorter. But there's real term, especially at the end of the pipeline.

Okay, that's great color. Appreciate it. And then just a bigger picture question, Wes, you know, 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 and then kind of the broader network effect that you're building, which I also think is accelerating the competitive advantage, can you maybe talk about the incremental margin potential as you kind of scale into the next phase and you know, how we should think about, like, operating leverage and, you know, whether that will accelerate, you know, 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 longer model beyond, you know, the next few years.

Yeah, I think that the example that I gave in terms of the capital that we've invested versus the returns it generates is a useful one. So a billion dollars out, $7 billion in is kind of a development yield. The broad side of the barn is the margins for the overall business. If the billion goes to $2 billion, because 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 you know, list the number of infrastructure development companies on earth that have 15 to 30% development yields, I think it'll 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 it's rightly so, on, you know, this quarter and this dollar and that dollar. I think that, you know, it is abundantly clear to me that we are headed to a billion dollars plus in margin, and that alone is as a development yield on infrastructure is an extraordinary business. It's one that has massive additional needs. You look at that energy equivalency in terms of what people's access to energy is around the world. Energy poverty is a huge thing. It has massive needs. 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. I feel like the offering of the company right now is an extraordinary one. 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 they'll be for the rest of this year and then going into next year. So, yeah, I think development yields in the mid-teens that – double that if you actually, you know, 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. Yeah. Okay, great.

Well said. Thank you, Wes. Appreciate it.

Great. Great. Well, thanks, everyone, for dialing in in the middle of the summer. I hope everyone has a great remainder of August. 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 and 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.