This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good day and welcome to the NFE second quarter 2024 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Chance Pipitone. Please go ahead.
spk02: Thank you, Samara, and good morning, everyone. Thank you for joining today's conference call, where we will discuss our second quarter 2024 results. The call is being recorded and will be available by replay on the Investors section of our website under the subheading Events and Presentations. At the same location, you'll find a presentation that we will walk through on today's call. Please review this as it includes important information, including disclosures and risk factors. With that, I'll now hand over the call to our Chairman and CEO, Wes Edens. Great. Thanks, Chance, and welcome, everybody.
spk04: Please refer to the slide deck that we posted on our website as well as on this call. We'll be referring to that, but we have a lot to run through here. I look forward to catching up. So let's start with numbers on page three. Our earnings for the quarter were $120 million in EBITDA. That was well below our quarterly goal of $275 million, with a miss of $155 million. The miss was entirely a result of the delay in the deployment of our first FLNG-1 asset. Our goal was to bring this online in April of this year, and for a variety of reasons, we missed this by several months. That's the bad news. The good news is we did bring it online last month on July 19th, and it's been performing very well since then. This is an incredibly valuable project, and bringing it online in the timeline we achieved is a major accomplishment. It's a $2 billion-plus investment, and today's market generates $500 million a year in free cash flow, so it's highly profitable and has a big impact on the business. But as a result of the impact of the delay of even a few months' material, it had a big impact on the quarter that recently concluded. As I said, the good news is the project is up and running and it's been performing well. We performed our first transfer of a partial cargo early this morning. We'll now shut down the unit for approximately a week for planned maintenance and then fire back up and expect to achieve full production levels shortly thereafter. This then becomes a cornerstone asset for our company. Flip to page four, please. Page four, this is a bit of a recap of our past, present, and future financial results are shown here. In 2023, we made $1.3 billion. In the first quarter of 2024, we made $340 million. That was the last quarter that we had any of the residual impacts of the FEMA contracts. It was a good quarter for us. The one that recently concluded, $120 million. Our goal and forecast is for $275 million a quarter for the remainder of the year. Q3 will also be impacted by the delay as we've got this online in July. We don't expect to get full production of this until the 1st of September, and thus it'll be somewhat reduced from the 275 goal. And then Q4 is a full quarters production of $275 million. The FEMA claim that we'll talk about in just a few minutes with Brandon will bring this up to total EBITDA expectations for the year. with a range of $1.4 to $1.5 billion. Guidance for next year is $1.3 billion. Basically, that is just the existing volumes and customers plus the addition of our Nicaragua and Brazilian assets. At this point, over 90% of our expected revenues are contracted, so we feel very confident about achieving these results and feel that there is room for significant upside, given that we're only about halfway through 2024. In addition, with the remainder of our Brazil contracts coming online in mid-2026, We expect this $1.3 billion to grow materially, which Andrew and Dede will go through in just a moment. Turning to page five. Our broadly diversified business is now very easy to model and understand, and here's the math for next year. Our total supply at this point is approximately 170 TBTUs. 50 TBTUs equals one ton of LNG, so we have a current supply in our portfolio of approximately 3.5 million tons for next year. The five countries shown in the net margins are weighted average of our various customer contracts. They range between the countries from $4.50 to $8 in margin. In general, this is a function of the proportion of the capital we invested in order to achieve these results. In simple terms, in those markets of the largest investment, in particular Brazil and Puerto Rico, our margins are the highest. The weighted net average is approximately $7. Multiply 7 times 170. gives you approximately $1.2 billion. At $109 million for ship operating margin, you get to our forecasted profit of $1.3 billion. Obviously, to the extent we sell more gas or more power, these numbers go up. We've invested approximately $8 billion to create this portfolio of gas and ships and power plants and terminals, and that investment is now behind us, and thus our goal is to grow organically from here with little or no additional CapEx. The deployment of the FLNG asset represents a watershed event for us with respect to our investment activities, And now we are singularly focused on organic earnings and free cash flow. Page six is a simple page which shows you arithmetic behind the FLNG-1 project at current market levels. You can just follow along the top. Total capacity of the unit is 1.4 million tons, which is 70 dbtu. Cost of LNG produced today is Henry Hub plus $2.50, or about $4.50 in total. The average margin of our business, as I said, is $7. Seven times 70 equals 490. Using our own facility and ships greatly reduces our logistics costs by $100 million, which then adds up to $599 million, or roughly $150 million a quarter. It's a pretty simple map. Click to page seven. Operationally, we had a terrific quarter, highlighted by the FLNG-1 put into service. First cargo was actually transferred early this morning. Planned maintenance starts tonight for seven days, and we expect full production shortly thereafter. Completion of FLNG 1 triggered the FLNG 2 financing, which is entire equity finance and requires no additional equity capital from us. The Brazilian terminals are complete. There's a beehive of great activity that I'll leave to Andrew to go through. Nicaragua is also nearly complete, and I'll run through that in just a second. So if you flip over to page number 8, well, let's talk about Nicaragua. This is on the left-hand side is a picture of the power plant that we have built that is 100% completed. It's a 300-megawatt power plant. I think it's the first new modern power plant built in the country in the last 30 years. It is ready for operations. Five miles away, there's a jetty that the FSU will be moored at. That jetty is 95% complete, as you can see from the picture here, waiting for the ship to show up. The last bit of kit to be installed is the five-mile pipeline. All those construction materials were delivered in the last couple of weeks, and they're ready to be installed. We expect that to be completed in September and begin operations thereafter. Our power plant is also located next to the IDB line, which allows us to then export power from Nicaragua to neighboring countries. So we feel like this is not just a Nicaragua terminal, but actually a Central American terminal. We think that there's a significant amount of activity that will come as a result of that. With that, let me turn it over to Andrew.
spk09: Andrew? Good morning, everybody. Thanks, Wes. I'm on page nine for a similar update on Brazil. So two big assets that we want to check in on that are a big part of our kind of future growth and future projections here. The first is the Selva 2 power plant. So that's our 630 megawatt power plant with the COD of July 2025. You can see a picture of that on the left. It's a small picture, but there's a big site and a ton of activity going on there. It's a 630 megawatt one-on-one combined cycle power plant, 25-year PPA, fully financed with BNDES debt from Brazil, and we're 70% complete today and well on track to convention cash flows in the second half of next year. So everything's going great there. As you know, this power plant is adjacent to our Barcarena terminal, which has been operational now for a few months. We've had two different cargoes loaded into Barcarena already. So we're operating very well, and everything's going great in Barcarena and Selva. To the right is our Port of Send project. So this is the project that we acquired in December, and we've made great progress since then. So 1,600-megawatt power plant, 15-year PPA. We are now fully permitted. We've given full notice to proceed on our construction consortium, which is made up of Mitsubishi and Andrade Gutierrez. We've made great progress on the site, fully cleared. And as you can see from the picture on the right, we're actually starting to pour the foundations, which is a big step for us. And then Mitsubishi has made great progress on the turbines. You can see the picture of one of them. And we are well on track, actually well ahead of schedule for our COD, which is the second half of 2026. Norsk Hydro is moving through commissioning really well at the Bacarena Terminal. Gas volumes are up to about 60% of the contract demand as we commission the boilers and the calciners of their Alanorchi alumina refinery one by one. We expect to be at full ramp up on that contract by October of this year, and Baccaran is really coming together very well. I'm flipping to page 10 for a bit of a further update on Brazil. There's two other things we just want to check in on. One is our contracted EBITDA from Brazil. It's planned to be about $470 million by 2026 when we turn on the Barca Arena terminal, the two power plants I went through, and then also our TGS terminal, which is operational. So our current contracted book, $470 million of EBITDA by 2026. And then the second thing is the growth that we expect out of Brazil, which is really from our TGS terminal in Santa Catarina. We are expecting the power auction to happen this year. We expect to win 2.5 gigawatts of power. That will be a mix between power that NFE builds and owns, and other power plants that we supply on a contract which will pay us a fixed margin plus compensate us for the gas supply. So we have $470 million of contracted margin. We believe that this power auction in Santa Catarina can increase our EBITDA by another $400 million. And so we have great growth in Brazil over the next three to five years. I'm going to move next to the structure on capital structure and capex update on page 12. So we have a few pages here to really walk through our next steps for the capital structure of NFE. And on page 12, we have two main initiatives. First is to refinance our existing 2025 notes. Those are due in September of next year. We'll look to extend the maturity of those notes as soon as possible. We have an existing commitment to backstop this refinancing. And so we feel like getting those notes refinanced is secure. And we'll be in the market here soon to kind of get the best execution on that refinancing that we can. Second is we're going to target less than four times debt to EBITDA, and that's senior secured corporate leverage to EBITDA by 2026. You can see on the right side where we have effectively kind of shown what our guidance is for 2024 and 2025, as well as our LTM and 2023 debt to EBITDA metrics. And then you can see kind of how we're doing that math with all the debt laid out below that here. You know, as Wes went through, we forecast $1.3 billion of EBITDA in 2025, which would almost be exactly four times that EBITDA. And then in 2026, when PortoCen, Brazil, and other assets turn online, we'll continue to grow that EBITDA and be below four times that EBITDA. So, you know, based on our projections here, we end up at a very comfortable amount of overall kind of long-term leverage at the corporate level. The next thing I want to walk through is It's basically how we're going to kind of continue to create more overall cash for debt service to deleverage and then more, of course, free cash flow available for equity holders. And the first thing to kind of make that point is to show our CapEx. So page 13 is a CapEx overview for the remaining part of 2024 and then into 2025. The key point here is obviously we're done with FLNG1. So CapEx is going down precipitously. We've got kind of small bite-sized CapEx on our downstream projects to finish those out and start generating revenues in 2025. You can see Brazil, Mexico, Nicaragua, Puerto Rico here on the page. That leads to about $128 million of net CapEx at the end of the year. And then we have CapEx on FLNG2, which is also here as well, netted against the term loan that we have for FLNG2. So really, from a net CapEx perspective, we've got about $177 million for the remaining part of 2024, And then in 2025, that drops way off to 67 million of capex. So what you'll see, flipping to page 14, is how that materially impacts the cash generation. So what we wanted to do here is provide a very simple walk from our adjusted EBITDA reported numbers to what really is kind of our cash flow bill for debt service. So, you know, the cash we have to pay debt, eventually deleverage, and then, of course, also generate free cash flow. So in the remaining part of 2024, we start with a billion dollars of adjusted EBITDA and we end up with 683 million of cash available for debt service. In 2025, we're going to decrease SG&A, we're gonna decrease CapEx, and we're gonna end up, you know, 1.3 billion of adjusted EBITDA, but 933 million of cash flow available for debt service. So just wanted to provide a few numbers here on how lowering that overall CapEx spend actually leads to higher free cash flow for the business. And then flipping to page 15 is the real long-term initiatives on our capital structure, which is effectively to migrate what we showed on the first page of this section, which is the corporate loan leverage to asset-level leverage. This does two really important things for us. The first is it really harmonizes our long-term assets and contracts with longer-term debt. By having longer-term debt, we bring down cost and we're able to lower corporate leverage to the benefit of equity holders. So our FLNG-1 asset, 30-year useful life, $2 billion replacement cost, and we expect to have $250 million of kind of annual cash flow at the asset. So we're showing illustrative asset debt of about $1.5 billion, which we think is very achievable. On the right side, NFE Brazil, 18-year average contract duration, $500 million of run rate EBITDA in 2026, 2.2 gigawatts of power plants, 46 TBTUs of firm gas sales. And we expect almost $4 billion of enterprise value in 2026, which is a simple eight times the $500 million of contracted EBITDA. On that $4 billion of enterprise value, we'll have about $1 billion of long-term asset-level leverage, which we're using for construction. And then we assume we can get to basically 50% LTV on that, so another billion dollars of leverage. That, together with the FLNG-1 debt, would mean $2.5 billion of leverage would migrate from the corporate level over time to the asset level, and we'd end up with a long-term sustainable capital structure at the NFE corporate level, and then with assets where we've aligned our long-term duration cash flows and assets with long-term duration lower-cost debt. Wes, back to you.
spk04: Great. Thanks, Andrew. So let's talk about our new initiative, which is really just a continuation of an existing business that we've had around here for many, many years. So look to page number 17. A big, big part of our business here at NFE is the development of power systems and management of those systems. We own or manage 9 gigawatts of power between La Paz, Mexico, Puerto Sandino, our new project, Jamalco in Jamaica, Puerto Rico, of course, and then in Bacarena, Brazil. We are a global leader in power systems development overall. We own or have visibility of 2 gigawatts of turbines that are available for development in this modular form that we'll talk about in just a second. So our experience here is very, very significant. and in particular with respect to the deployment of modular, highly reliable power systems. If you flip to page number 18, the two pictures that are shown are the power plants we built for the federal government last year. 425 megawatts of power was built in just 120 days. It provides 15% of the baseload power to the grid to Puerto Rico and is by far the most stable and reliable portion of the grid with total availability of 99%. We're going to talk about this modular design with what we believe is the impact that we can achieve here in the United States on assisting data center tenants. But before I do that, let me turn it over to Brandon just to pause right now and talk about this project and the FEMA contract and the claim. And where we are with that right now.
spk06: Brandon? You bet. Thank you, Wes. Really appreciate that. And just as a reminder for folks on the phone, as Wes stated, this project originated with FEMA initiating a grid stabilization mission for Puerto Rico. NFE responded by entering into two contracts, each of which were for a two-year duration. to build about 425 megawatts of power. Just to put it in perspective, NFE built this power, put it online on the grid in 120 days. It's the fastest deployment of large-scale power in the history of the U.S. Army Corps, which is actually saying something. In addition, it's an essential piece of infrastructure for the PR grid. About 15% of the grid currently is supplied by this power, and to put that in context, without it, hundreds of thousands of customers in Puerto Rico would not be receiving power every day. Most importantly, though, these two particular power plants are 99% available and 99% reliable, which I think is a very key part of this particular solution, in particular how it will apply to other applications, which we'll talk to in further slides. To put a couple dates out there, on March 15th, NFE sold these two power plants to Puerto Rico at the end of the contracts that FEMA had decided to conclude. In addition, we entered into an 80 TBTU island-wide contract with no disruption of service. So from the point of view of the Puerto Rican people, these power plants continue to operate without interruption. Importantly, because our contracts were two years, the government does have a right to end contracts early if they have a change in need, a change in policy, or a change in strategy. However, if that happens, the government has an obligation to make certain payments to the contractors who are performing under those contracts. We have been going through a process which is considered a claim settlement process over the last several months to put together an extensive package with outside professionals who specialize in this, including our own team. We have submitted that package as a formal claim to Weston, who is our prime contractor, and they, in turn, have submitted it to the Army Corps. The claim is in an amount of $659 million, which approximates essentially what we are entitled to under the rules under this type of circumstance. To put it in perspective, there are billions of dollars that are remaining to be owed on the contracts of $659 million, so it's well within the four corners of what we would be entitled to under this process. In terms of next steps, we will go through a claim settlement process, which is a well-worn path, and we will update people as to the results once they are known. I think the important part of this project, though, is that it created extensive IP inside of NFV that showed us how, what technology to use, and the utilization of providing fast power for certain applications, including its reliability and availability. The speed at which we deployed this power, the team that we used, the IP that we created can be applied to other concepts, including perhaps the fastest growing area of infrastructure in the U.S., And for that, I'll turn it over to Wes to talk more about it on page 19.
spk04: Great. Thanks, Brandon. So these are the type of power systems that are most typically found in emerging markets that have significant power needs, and most importantly, they need power now. So for somebody that needs power now, giving them a power solution that turns on in three or four or five years is simply not reflective of what their needs actually are. As it turns out, there's another market much closer to home that has a very similar need, hyperscaler data center users. You wouldn't think that emerging markets for power and hyperscaler data center users would be similar, but actually they are quite similar. If you flip to page number 19, we formed a new company. We call it Klondike. It is focused on providing these kind of power solutions to data centers. Page 19 shows the incredible growth of cloud computing that has occurred as companies have moved their computing needs out of their own servers into the hands of Amazon, Microsoft, and others. To meet these needs, there have been literally thousands of data centers built in this country, and they've traditionally been built along the lines of the steps outlined on page number 20. Step one, identify a site. Locate that site close to end users slash city centers to mitigate latency issues. Step two, apply to the local utility for power. Power supply is subject to grid availability, but these were modest amounts of power initially, and so that was the process that was followed. And number three is the data center then to increase the reliability actually constructs their own backup power, which is necessary to provide the power redundancy that they need for their customers. These steps require connection to local grids, creating power struggle with local consumers. New grid connections can take three to five years, and data center tenants need power now. Click page number 21. This is a schematic that shows the island power that we are designing. In simple terms, it's the same basic formula which Brandon just described in Puerto Rico and Mexico and elsewhere. What we've done in addition to what we installed in those markets is we installed backup generation to provide additional redundancy. So if you look at the schematic, you can see an array of turbines that are shown on the upper middle and upper right-hand side, and then four additional turbines that are shown on the left-hand side. Basically by increasing the number of backup units, you take system reliability, which is already extremely high, 99 plus percent in our experience in Puerto Rico, and you make it well over 100%. And you achieve then the five nines of reliability that are necessary for the data center users and do so in both a very efficient way, a very, very quick path that's 120 days to deploy, and one that has ultimate system reliability. So page number 22, We're addressing all the major constraints of digital infrastructure development by utilizing this behind-the-meter onsite power, and the business is off and running. So step one is to identify a site with either a data center partner or our own site, and we're working on both as we speak. We are preparing to file permits on the site that we own in Pennsylvania. Pennsylvania and Ohio, in particular, we believe are very attractive because of their physical proximity to large population centers, as well as very abundant and inexpensive natural gas. which is a terrific combination. So step one is to identify a site that works. Step two is to develop this state-of-the-art smart island grid, which we're in the process of doing right now, which utilizes the same factors which I outlined on the previous page to achieve redundancy. And number three is get power permits in hand and install this and turn on power next year. Page 23, you know, we outline, we have a number of our sites in our portfolio that we think are very suitable for fast power situations. We have the large site in Wyalusin, Pennsylvania, which we fired years ago. We have a site in Shannon, Ireland, which is the site where we're intending to build a power plant. We provide power in part to the grid in Ireland and have the capacity to provide behind the meter power to data center tenants there as well. And then a large site in Brazil, which is permitted for 1,000 megawatts of power on a 100-acre site located off the TBG pipeline so we can provide the gas to provide the redundancy there. The economics of this business are potentially very compelling. Our expectation is we'll enter into a long-term commitment with data center tenants that are creditworthy. This can provide certainty of cash flow, allow us to finance this at a very low cost for an extended period. It's very exciting days for this business and one which, if it's successful, we would likely spend to shareholders as the valuation metrics for this industry, given the growth attributes of it, are very, very appealing. So a lot more to come on that. Chris.
spk07: Yeah, thanks, Wes. Good morning, everybody. Let's turn to slide number 25 and talk through earnings for a moment. As you've heard from Wes and Andrew, which have covered the bulk of the financing initiatives of the company, I'll quickly walk through the financial results for the second quarter. Total operating margin was $202 million from sales to customers through our downstream terminals, in addition to $12 million associated with LNG sales. And on this quarter, as we did in Q1, we had another $34 million of operating margin from the SHIPS segment. So it's a total segment operating margin of $248 million, which compares to $384 million in Q1. When you back out SG&A and deferred earnings, our adjusted EBITDA for the first quarter was $120 million. The deferred earnings line will be further explained in the 10Q, but this is a result of a $90 million payment received for gas deliveries that will occur during Q3 and Q4. On these sales, we locked in commodity pricing and will record $107 million of EBITDA and earnings associated with these volumes throughout the balance of 2024. As previously mentioned, the decrease in adjusted EBITDA quarter over quarter is predominantly driven by the termination of the FEMA power contract. This decrease was expected to be made up in large part with volumes from FLNG-1 available to sell. However, those did not occur in Q2, and the $120 million of EBITDA was the result. As Wes mentioned, once you have a full quarter of volumes from FLNG-1, we would expect the quarterly adjusted EBITDA to be around $275 million. Moving on to slide number 26, we show the gap net income for the quarter, which was an $89 million loss, or 44 cents per share, on a diluted basis. There's only a modest change to adjusted net income, which adds back a non-cash impairment charge of $4 million, or 3 cents a share. So if you add up Q1 and Q2, for the first half of 2024, we have $53 million of adjusted net income, or 26 cents a share, and $142 million of funds from operations, or 69 cents per share. Also, just to repeat something we've mentioned in the past, when we collect on the claim from FEMA, that will be recognized as EBITDA and income during the period in which it is received. Finally, I wanted to mention that NFE's operating assets in Jamaica, Puerto Rico, and Mexico had 99% uptime and reliability for the quarter, which is a testament to the tenacity of our team. With that, I'll turn the call back over to Chance for Q&A.
spk02: Thanks, Chris. Operator, if you would, let's open up the lines for some Q&A. Thank you.
spk00: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a microphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up. And we'll pause for just a moment to allow everyone an opportunity to signal for questions. And we'll take our first question from Ben Nolan with Sievel. Please go ahead.
spk05: Yeah, thank you. So my first question is related to the contract. Looks like you've maybe got $500 million of that in the EBITDA for the back half of the year. Can you maybe talk through how you feel about how you come to that number and Any flexibility on timing? Is it a 4Q event, or might it slip into next year? Any thoughts around that?
spk06: Yep. Ben, this is Brandon. Thank you for the question. And probably what I'll use it as is just an opportunity to kind of, you know, lay this out and sort of demystify it. As I kind of said on the call, you know, the original contract was for two years. Government has the right to terminate early. Under various circumstances, when that happens, there is a very tried and true kind of playbook and set of rules that you go through as the counterparty to the government to basically settle up. And the idea from the government perspective is they're trying to put you in a place that you would have been had they fully performed, particularly with respect to investments and commitments, etc. I think the key concept to kind of realize here is, you know, keep in mind what we actually did for them is build two power plants, 425 megawatts, and that work was complete at the time of COD. So functionally, the investments, commitments, you know, all the other things that we positioned the business to do were in effect done at the time we turned on the power plant, which is, I think, a key concept. So when you go through this process with them, if you kind of aggregate gross sort of amounts owing under those two contracts, kind of from the time that they stopped to the time it would have finished, you know, obviously you know the math. It's measured in the billions of dollars. So we've gone through, you know, an extensive dialogue with Weston, who is our counterparty. We have, you know, lots of folks who do this, you know, professionally all the time for the government. And through that process, we've we have kind of, you know, zeroed in on really two concepts. One is the fact that, you know, we did a ton of work around infrastructure, logistics chain, and kind of positioning our business to make it work, particularly with respect to like ships and terminals and, you know, gear, et cetera. And then also with respect to the fuel that was being provided. So when you add all those line items up and you kind of go through the entitlement and rules, it actually adds up to right around $659 million. So that was put on a piece of paper with thousands of pages back up, submitted to Weston. They in turn did their initial take on it. We had a little bit of puts and takes on that, but essentially the number stayed the same. And then they turn around, put their name on it, and then send it in to the Army Corps for processing. And then effectively, you will enter into what is best thought of as a contract settlement process with them at some point. Now, Weston is our counterparty. So that's actually the person that we'll be dealing with, and then presumably we will make ourselves available for the Army Corps. As to timing, I think there is, you know, no certainty on that because, you know, you're talking about, you know, a government process that there would be a dialogue. around, but, you know, just keep in mind the following. You know, we have been, you know, in dialogue, you know, for the last, you know, four or five months going back and forth over, you know, the details, providing information. Functionally, what you're doing is checking off on somebody's due diligence checklist, and so we'll continue that process, make ourselves available, you know, as soon as anybody wants to talk about it. I think our belief is that we will get engagement here pretty soon, and our goal is to try to settle this in the third quarter.
spk05: Okay, appreciate it. And then sticking with Puerto Rico for a second, and thinking about the incremental 80 TBTU item wide side of it. It should be online in the fourth quarter. Is there is there anything that would would stand in the way of that reaching that threshold? And is the power generation, gas powered power generation sufficient to absorb all of that? I mean, is there anything that could get in the way of that?
spk06: Yep. I'm going to start by answering it in this way, just because of the way you ended it. I think the way to think about the Puerto Rican system, because this is our strategy, is it actually needs 5,500 megawatts of power. That's the way to think about it. It peaks at 3.3 gigawatts. You need about 700 megawatts of operational reserve, 900 megawatts of maintenance reserve, and 600 megawatts of generation reserve. That's what they need. Today, you don't have that. And so, functionally, what's getting ready to happen is with our, you know, two power plants that we made available, plus the megagens that will be converted, plus Mayaguez that will be converted, plus the other projects that we're doing, including adding additional power, either through our own process or through the P3 process, you know, our expectation is we'll hit those metrics, you know, certainly over time. As it relates to today, you know, what we are hyper-focused on are things that we could convert in the short term. The megagens, as we talk about often, are gas-ready today. You know, there's a regulatory process that we have to go through that we're almost complete. But as soon as that paperwork comes in and is done, then that 86, 90 megawatts will be turned on to gas. Once it's turned on to gas, it'll go down in the merit order, up in the merit order, however you want to think about it. In other words, it becomes cheaper. and more likely to dispatch, and then, you know, more likely to displace diesel and other generation, both because of inefficiency and fuel costs that are currently running.
spk04: Yeah, and one other thing to amplify on that, Ben, is that when you, our business now is so easy to model, and I went through the numbers on the page, so 170 TBTUs, of that, about 150 of it is already contracted, right, not including the upsides in the Puerto Rico contract. So, your 88% of the 2,025 results are essentially 100% contracted or 88% contracted right now. The incremental volumes that Brandon is talking about are the other 40 or so TBTUs, so you'd actually have to go out and buy incremental fuel in order to supply those contracts. Also, a happy coincidence is that The margin on the Puerto Rican contracts, as we go through the illustrative margin there, is about the same margin if you just sold those volumes into the marketplace. So the market for LNG today is about $13. The margin on those contracts would be about $13 as a sale price. So it doesn't really matter. There's literally no incremental risk one way or the other. Obviously, our goal long-term is to serve customers. We want to serve our customers there. As Brandon said, when you look at the island-wide needs that they have for power and cheaper power and cleaner power, they're significant. They're far beyond the size of the scale of what the contract is in place. So we feel like the organic ability to grow that contract is material. Simply fulfilling it will actually utilize all the existing portfolio of gas that we have right now And we think there's a significant amount of upside beyond that. And then last, and again, the same point, is that the price in the market, the price in the markets for our products is basically the same. So in that happy coincidence, there's actually no real financial exposure whatsoever. So it's an incredibly secure price today, if that makes sense.
spk00: Thank you. And we'll take our next question from Greg Lewis with CTIV. Please go ahead.
spk08: Yeah, hi. Thank you, and good morning, and thanks for taking my questions. You know, I guess I want to follow up with Ben just in some of the comments. So as we think about, you know, where the market is today around pricing and realizing those spreads, How are we thinking about, and with the financing coming up, how are we thinking about hedging our natural gas, our power exposure? How are we thinking about that on the commodity side? Is that something we're actively looking to do and just kind of an update there?
spk04: We essentially have no exposure. As I said, we have a portfolio of 170 TBTUs. You have current demand, current demand in hand for 150 TBTUs with a large pipeline behind that. And the market is basically right on top of what our net spreads are to deliver to customers. So in terms of our business, it is really purely a spread business right now. We basically buy gas from manufacturer LNG, right? And we list there's a couple of portfolio purchases that we make on a long-term basis that we have our own. We have long-term off-take contracts. The average term of our contract is well in excess of 10 years. We then simply provide logistics in the middle and deliver to it. So it really is a spread business. It's one we have spent $8 billion roughly building to get to this point. So we invested a tremendous amount of capital to get there. We made $1.3 billion last year. We think we're going to make between $1.4 and $1.5 this year. Notably, with no additional FEMA dollars coming whatsoever, We think the number is $1.3 billion as the guidance for next year. I showed that as simple as you possibly can, which is 170 TBTUs times the $7 margin that is across our business, plus the $100 million roughly of ship operating results. That gets you to $1.3 billion. As Andrew said, incrementally, what is in hand, long-term contracts, capacity payments, Additionally, in Brazil, add hundreds of millions of dollars to that. So you really have a business which now is rock solid, is highly diversified, has a billion and a half and growing EBITDA in the gun sites for it with essentially no more capex spent to do it. So that's the profile of the business right now. Obviously, the results of a quarter like this are disappointing, but you're measuring a 30-year business across the three-month time frame. We had a delay of a couple of months. Unfortunately, that happens. That's behind us. It now operates. It works well. And so we feel like, you know, the financial footing of the company is incredibly secure. We've got, as Andrew went through in great detail, we have a real goal to have less debt in longer term and lower cost debt over time. And the path to get there is incrementally just to perform as we have. And we'll go through it. And we feel really, really good about the prospects for doing that, you know, productively here in the very short term.
spk08: Okay. Pennsylvania and Ohio. I mean, obviously everyone saw the PGM news around the auction pricing. Could you talk a little bit about, is that an opportunity or just where we look today as we bring your fast power solution to that area of the country? I guess, how should we be thinking about that over the next couple of years and that opportunity? Yeah.
spk04: Yeah, I think that it is perhaps the best market for data center development, not just in the United States, but perhaps around the world. It's got a combination of plentiful land. It's got actually large population centers which are nearby, and it has very inexpensive and very long-term gas. So gas today, the lighting index today is around $1.50. So the actual energy payment component of that is actually really, really attractive. The challenge for the data center providers is exactly what I outlined. If they're going typically to a utility and saying, I need 5 or 10 or 20 megawatts worth of power, they'd apply for a grid connection, they'd get it in relatively short order, they'd develop it and move on. They now go in for hundreds, if not thousands of megawatts, and that's a real problem. And so what you've seen is at PJM and then at the utilities, AEP and others, a real backup. So what was previously maybe a six-month or nine-month process now can be a three-year or a five-year or a seven-year process, and that simply is not responsive to the business needs that they have. That's where we come in. The fast power solutions that we have, the IP, as Brandon described it, is incredibly valuable. And what's also incredibly valuable is that we have a portfolio of turbines in a warehouse, plus we have access to other turbines, and so we have the feedstock that you need to actually then provide this, and the knowledge and the ability to install this quickly. So the basic process is take a site. We have a phenomenal site in Wyoming that we developed over the last several years. It's on a large natural gas pipeline. It's got adjacency to fiber. It's actually close, just down the road, actually, from the town power plant, so it gives you some sense of, like, the attractiveness of that to a prospective data center user. We then simply build, apply for permits, build our power, provide redundancy to it that then allows it to mimic the redundancy they would get with a grid, except it's an island power, and we can do so and turn on power, we think, in 2025. There is no way they can get power out of a grid in 2025. In fact, for most of the utilities around the country, we think that the timeline to get power could be three years or four years or five years. So go call your favorite hyperscaler tenant. There's many of them. Ask them what their prospects are for their business. The answer is great. Ask them what their prospects are for getting power now, and their answers are decidedly less great. That's basically the business. What we want to be is the power provider to these data centers. This is not a me-too, let's go build a bunch of data centers. There's a lot of people that can do that and do a terrific job at that. What we are very expert at is providing fast and low-cost and reliable power systems that That's what they need. That's what we have. That's what we think the opportunity is. And I think the best place to prosecute that, in my opinion, at this point, is Pennsylvania and Ohio, because they both are places that have lots of demand from the hyperscalers for data centers, and they have abundant supply of gas. And those two things together are a very, very powerful combination.
spk00: Thank you. And we'll take our next question from Craig Scheer with TUI Brothers. Please go ahead.
spk03: Good morning. Thanks for taking the questions. So after Nicaragua, do you see further downstream growth in 2025 restricted by a growth of economically contracted or internally produced LNG supply? And how do you see that changing for the better or worse in the 2026, 2027?
spk04: It's a really good question, Craig. As you know, there still is a shortage of LNG. That's why prices are still relatively elevated, modest compared to where they were at the height of the Ukrainian-Russian conflict, but still reasonably high. So if you think that Henry Hub next year is forecasted to be around $3.50, add $2.50 is a good proxy for what would be the cost of it plus an add or something. That's a $6 cost to buy LNG in the marketplace long term. And the market is roughly $6 or $7 higher than that. It's $13, $13.5, kind of et cetera. Those numbers come down dramatically as you move to 2027 and beyond. In 2027, 2028, there's a significant amount of energy supply that's coming online in Qatar and other places in the world. Venture Global has a significant amount of supply at that point in time. So we think that there is a bit of a window. That's why we're so focused on getting this first asset up and running. Today, 2024, 2025, 2026, very valuable. After that, we think it's a much more normalized market. In a more normalized market, the power is the downstream. And so the $8 billion we've spent in developing largely our downstream portfolio allows us to access markets that are large and growing, Mexico, Brazil being the top of that list, but also Puerto Rico, Central America, Jamaica. Those are countries that also have incremental demand. We feel like there's a lot of organic growth to come from our portfolio. We think there's a lot of availability of gas out a couple of years, and we've got our own supply to take care of our customers over the next couple of years. With the numbers that are in hand right now, the $1.3 billion we feel is rock solid, and we feel like the increments in Brazil are another several hundred million dollars are actually contracted and are being built, as Andrew detailed in great precision. So a billion-and-a-half-dollar business at this point we think is very much where we are right now, and there's a substantial chance that we can grow that.
spk03: Okay, and as a follow-up – To your point, Wes, I mean, $2.50 contracted netbacks long-term for liquefaction. I think in one of your slides, the implicit was $3.50 effective netback presumed value for FLNG. Is that $2.50 to $3.50? Should we just see that basically included in the $7 average downstream margin, or do you see that additive in some way over time?
spk04: No, it's basically included in the margin. Really, we think of the asset as producing gas into our own portfolio. The benefit of producing it over the next couple of years versus the market is well over $1 billion. So if you just simply take the 70 TBTUs of production and look at it over the next couple of dollars versus market, it is over $1.2 billion in incremental benefits. So the way I think of the asset that just came online is actually a combination of, number one, $2 billion roughly in terms of the cost to replicate it, and number two, just being in business today and taking advantage of higher prices gives you the benefit of another billion, too. So you're well over $3 billion in asset value. That's how big of an impact that this has on our company, our finances, our book value, kind of, et cetera, et cetera. But at the end of the day, we view this as an integrated model. And the simple way that we describe the business and the fact the way the business exists is just simply You know, the amount of production that we have, 170 TBTUs at this time, times the margin of $7, that's what gives us the $1.2 billion plus $100 million. That's the base load of your $1.3 billion before the additional growth in Brazil. So it's a greatly, greatly simplified and straightforward and diversified model. There's no lumpiness to it. There's no real subjectivity to it. There's not really a bunch of things that we're wishing and hoping and forecasting about this. It's really a business that exists, long-term contracts to long-term offtake, with very little credit exposure is the core of the business.
spk00: Thank you. And we'll take our next question from Tariq Ahmed with J.P. Morgan. Please go ahead.
spk01: Good morning. I'd love to get some more color from you guys on how you think about the capital intensity of the Klondike business and sort of how do you think about financing that business over time?
spk04: We think it basically is very little in terms of capital intensity because the nature of the contracts are going to be very, very long off-takes to very, very high credit worthy tenants. So we think it's a very capital-like business and basically one where we'll sign a modest amount of capital for down payments on turbines or transformers or things like that, but really down payments. But long-term, we think it is a highly cash flow generative business with very little equity capital long-term just given the nature of those contracts. those contracts.
spk01: And then secondly, I just love any color you can give on sort of when you plan on starting to address the 25s and 26s, your senior notes. I think you said during the prepared remarks you had a commitment in hand on the 25s.
spk09: Hey, it's Andrew. Yeah, that's right. You know, look, it's obviously not the best market it could be, but, you know, we feel like we need to, you know, extend the maturity out. And, you know, we'll be looking to address that in the very near term.
spk00: Thank you. And at this time, I will turn the conference back to Wes Eden for any additional or closing remarks.
spk04: Great. Well, thanks, everyone, for dialing in. Appreciate the calls and the feedback, and we'll look forward to speaking to you all in the near future. Thank you.
spk00: Thank you. And this concludes today's call. Thank you for your participation. You may now disconnect.
Disclaimer