Earnings Call Transcript - NFE Q4 2023

Operator, Operator

Good morning everyone and welcome to the New Fortress Energy fourth quarter and full year 2023 earnings conference call. Today's conference is being recorded and all participants are in a listen-only mode, but later we'll have the opportunity to ask questions. To get us started today with opening remarks and introductions, I'm pleased to turn the floor over to Managing Director of Strategy and Investor Relations, Mr. Chance Pipitone. Please go ahead, sir.

Chance Pipitone, Managing Director of Strategy and Investor Relations

Thank you, Lisa, and good morning everyone. Thank you for joining today's conference call, where we will discuss our record fourth quarter and full year 2023 results, recent developments, operational highlights, and our future here at NFE. As Lisa said, the call is being recorded and will be available by replay on the Investors section of our website under the subheading, Events and Presentations. In that same location, you will find a press release regarding our fourth quarter and full year results and the corresponding presentation that we’ll walk through on today's call. As we proceed through the discussion, we will be referring to that presentation, and in that same presentation you will also find a series of important disclosures related to forward-looking statements and non-GAAP financial measures. We encourage participants to review these important disclosures in addition to the description of risk factors contained within our SEC filings. Now let’s dive into the call. My name is again Chance Pipitone, and joining me today from New Fortress Energy are Wes Edens, Chairman and CEO, Chris Guinta, CFO, Andrew Dete, Managing Director, and Brannen McElmurray, Managing Director. Thank you. Wes, over to you.

Wes Edens, Chairman and CEO

Great, thanks Chance, and welcome everybody. As Chance said, as usual, please refer to the deck that we posted here just a few minutes ago, and let’s start at the beginning. Page 3 - 2023 was a very good year, fourth quarter a record for us as well, and from an operating perspective $1.3 billion in EBITDA, $388 million in EBITDA for the quarter, more than doubled earnings per share and FFO for 2022 to 2023, and we’re poised to roughly double that again this year, so tremendous financial results. Most importantly, when you look at the second line down - it’s not numbered but it’s the second line, the profit from cargo sales, you’ll see zero contributions from cargo sales in Q3 and Q4, which now fully reflects that our business is operating on and through to the terminals to our customers in our sales of gas and products and power, and so very much an operating company now as opposed to a development company. The combination of core earnings at $6-plus a share along with a 50% growth rate over the last year and projected for this year, plus a 10-year plus duration of our portfolio gives us a significant competitive advantage, and we feel very undervalued at these levels. Now let’s look at Page No. 4, where we have summarized our operational highlights. Starting with Brazil, we returned from there late last night. In the news yesterday, you might have noticed that both the Barcarena and Santa Catarina terminals are completed and operational. The Brazilian market is enormous, and the potential for further growth is quite substantial. The synergy of our terminals in gas and power provides us with a significant competitive edge, which I hope will be recognized in the near future. Puerto Rico, which has been a huge part of our success in the last several years, we really highlight the two installations for the FEMA power plants that we’ve built in the middle of last year. These power plants have become essential to the island’s energy security, the most reliable power on the island. We’re working with the government closely on many different fronts and are very confident to both grow and continue our business there. At Fast LNG lastly, there’s a lot of news around that, so in short terms, we installed the first of our facilities and we expect first LNG in the month of March and the first cargo in the month of April. The existing downstream in Puerto Rico and FTA countries make more than covers the amount of LNG we will produce from these two facilities. In recent developments, we obviously disagree with the liquefaction pause that the government has taken, but we’re the only company, we believe, that’s not affected by this as a result of our downstream customers and our ability to export to both Puerto Rico as well as the other FTA countries, so that’s very good news. Page 5, the financial highlights, a very tremendous year in both the quantity and quality of earnings. What that means in simple terms is that the operating earnings that we generate will then go to the bottom line for distributable cash flow for us to run the business and manage our parcels going forward. On the left-hand side, on the power side, you’ll see that we are very much a power company, so 8.689 gigawatts of power, so very, very large power company we both own, manage, and provide fuel supply to. Our intention is not to be exposed to changes in market price, and I would say that if you look at our results for the last two quarters of the year, you’ve seen a precipitous decline in the world’s LNG prices, and our earnings not only were stable but they’re actually growing, so very clear evidence that we are not tied into market prices for LNG. That’s not our intention, but the results speak to it. The bottom line on the terminals is that while they currently have significant amounts of throughput, they also have significant amounts of potential upside utility. Jamaica, we only use 10% of our utilization, Puerto Rico 25%, Mexico 10%, Nicaragua 20%, Brazil 40%, so these terminals have got a substantial amount of upside. With that, I’ll turn it over to Brannen to talk about Puerto Rico. Brannen?

Brannen McElmurray, Managing Director

Thank you, Wes. Let’s move to Page 9 of the presentation. As Wes so often says, affordable, clean, reliable power is the cornerstone of economic activity, and in that regard a majority of the world is underserved. There’s no better example of this in the U.S. and its territories than Puerto Rico. We’ve been investing in Puerto Rico’s infrastructure since 2017 following a series of devastating natural disasters, including two hurricanes just two weeks apart. NFE began developing critical energy infrastructure in Puerto Rico to improve reliability and lower energy costs for ratepayers. Our first project was the San Juan energy port, converting an existing combined cycle power plant to burn natural gas rather than diesel, and constructing a fuel import terminal to support it. Our operations began in 2020 after completing construction in the depths of COVID, a true testament to the dedication of our team and stakeholders. Today, this facility delivers 15% of the power to the PR grid with reliability in excess of 97%, while significantly reducing emissions and generating over a billion dollars in fuel savings to ratepayers’ life today. Most notably, this asset provides NFE a significant, sustainable competitive advantage on which to deliver more value to Puerto Rico through follow-on infrastructure investments, such as those we will highlight in the next slide. Turning now to Page 10, we continue to invest in more reliable, clean, affordable power for Puerto Rico, and in 2023 expanded our presence with two major developments. First, fast power deployments - after a rigorous selection process, NFE was picked by the U.S. government to build and operate 350 megawatts of fast power across two sites in Puerto Rico in order to stabilize the grid. Together, these sites provide 15% of the power to the Puerto Rico grid with reliability in excess of 98%. The second initiative is the privatization of PREPA’s thermal generation fleet. NFE subsidiary, Genera, won the mandate to manage PREPA’s thermal generation fleet for at least the next decade in a rigorous privatization process. I’m proud to say that Genera is delivering tangible wins on each of these three goals during its first year of operations. Moving to Page 11, the majority of Puerto Rico’s generation assets are now managed by NFE or our subsidiary, GeneraPR. Our footprint consists of 5 gigawatts of power across 17 sites, over 700 employees, and most importantly, 1.5 million customers. We manage 85% of Puerto Rico’s total generation capacity, but 57% of this capacity continues to run on diesel or HFO. This creates a tremendous near term opportunity for NFE’s business. Moving to Page 12, NFE continues to engage with the Puerto Rican government, FEMA, Army Corps, DOE, and other stakeholders on a broad range of topics. We are bringing advanced generation and storage technology to Puerto Rico that improves the level of service for all customers. Puerto Rico has the highest priced and least reliable power in the U.S. and its territories. The average Puerto Rican customer is 600 times more likely to be without power than a customer in mainland U.S. The good news is the situation can be fixed, and here are just a few of the initiatives we are executing on to address it. We’re adding large scale battery energy storage systems to the grid, reducing frequency of load sheds by 90%, adding additional generation through peakers and black start assets, the first new conventional generation on the island in years, and we’re implementing a fuel switch and supplemental power strategy to add megawatts now and ancillary services later, to strengthen the grid and make it renewable ready. We continue to invest in Puerto Rico and expand our franchise there by adding essential infrastructure. These projects and the experience they bring can be readily applied to other markets addressing similar challenges, creating opportunity for NFE in other jurisdictions seeking solutions to accelerate the energy transition. This drives value to NFE as the solution provider of choice. I will now turn it over to Andrew to talk about the exciting business he and his team are building in Brazil and the tremendous advances made there. Andrew?

Andrew Dete, Managing Director

Thanks Brannen. Hello everyone, good morning. I'm on Page 14, and very excited to announce that our Barcarena terminal is now operational. Wes and I were here yesterday and had a great event with the governor of the State of Para and the Minister of Mines and Energy in Brazil, and we stood on the FSRU and looked back at the shore. That was pretty cool to highlight how from the terminal here, you can actually see the three big contracts that we have. On the left side on the top of the page, you can see the Alunorte aluminum refinery owned by Norsk Hydro, that’s where we have a 15-year agreement to sell 30 TBtus. Moving to the right, our current 630 megawatt power plant, which we call CELBA, is 50% complete. That will reach commercial operations in July of 2025 and has a 25-year PPA. Then on the land just adjacent to that, to the right, is where we’re going to site the new 1.6 gigawatt PPA that we bought from Denham Capital and CEIBA Energy. That will COD next year, July 2026, and have a 15-year PPA, so super exciting for us to open this terminal. As you can see from the picture too, what we did here is really extended an offshore jetty, so it was a very cost advantaged project and it benefits from the FSRU Energos Celsius, which we just finished completion of converting in a yard in Singapore, and so the FSRU arrived a few days ago, fully hooked up, and we’re ready to flow gas in Barcarena. Not to be outdone, the next page is we’re announcing that the Santa Catarina terminal is now operational. We’ve obviously been working on both of these for three years, and I think they’ve been in permitting and development for another five years, and so not totally planned but they did arrive basically within a day of each other and are getting hooked up also within a day of each other, so another great project here. Flipping to Page 16, Wes alluded to it - you know, we’re very, very excited about the opportunity in Brazil. We really believe this is one of the best LNG and power opportunities globally. The other thing to remember is not only is it one of the best opportunities, but it really is at a scale that’s unprecedented for NFE. There are three things that I want to highlight in terms of why we love this opportunity. From left to right, the first one is the overall demand growth for energy in Brazil. There’s many ways to come at this stat. What I really like is the 4% year-over-year increase in electricity consumption. That may sound like a modest number, but when you’re talking about a grid of 85 gigawatts, 4% is a huge number. Then we spent a lot of time, even just yesterday, with the Ministry of Energy, and what they’re actually forecasting is the need for 20 gigawatts of new dispatchable power by 2032. Brazil has a very interesting grid, and it might actually be a peek into the future for some of the rest of the world - we’re almost 80%, probably 75% of the power is renewables and hydro. The second thing is really the mechanism for acquiring new power. Brazil has a great history of acquiring long term contracts for power capacity, over 35 gigawatts have been awarded in these auctions since 2006. The third is the robust local capital markets. We have significant financing support from Brazil Development Bank, which is called BNDS, where we financed our CELBA power project. What this allows us to do is continue to participate in these auctions, build up our portfolio which today is 2.2 gigawatts - we think that’s going to 4 gigawatts or 5 gigawatts this year, and we’re able to finance a majority of the project CapEx with really competitive asset-level debt. On the right, we just put a couple stats to compare to the U.S. Brazil is one-fifth of the energy use per capita in the U.S. and has a population growth that’s about five times. Flipping to Page 19, just to talk a little bit more about the grid and trying to underline our opportunity here. On the left side you can see what I mentioned, is 60% hydro in the grid, that’s the real thing to understand about Brazil. These are amazing projects. On the right side is the problem that they’ve had. You’ve had a very volatile energy price. Brazil thinks a lot about this problem and has done many things. One of the challenges is just how fast they’ve grown. When these hydro plants were first built, the reservoirs were capable of storing enough energy that would last Brazil for many years. Flipping now to Page 20, one of the things that really underlines the opportunity in Brazil is there isn’t enough gas. NFE has identified this opportunity in two very distinct and focused ways. On the left side, what we’re trying to underline is our regional strategy. Where we see regional gas supply constraints amidst increasing demand is a perfect place for LNG. Then on the right side is the second opportunity I want to highlight, which is the power auctions coming this year. Brazil forecasts a need for 20 gigawatts of new dispatchable power by 2032. That gives us at Barcarena 30 TBtus of gas supply, 2.2 gigawatts of power, and an 18-year average contract duration. That all equates to $500 million in contracted EBITDA once we’re fully run rate on these contracts in 2027.

Chris Guinta, CFO

Thanks Andrew. Good morning everybody. Let’s flip to Slide 22 and talk through our FLNG projects. Over the last three years, we’ve assembled an amazing team of employees, contractors and construction partners that have been working around the clock to make our first FLNG unit a reality. The headline is that we’re in the final stages of commissioning and expect first LNG in late March and our first cargo to sail in April. In late 2020 and early 2021, we were seeking to add to our LNG supply portfolio and found it difficult to get the quantity and the duration that we required. We did go to work building the modules for gas treatment, liquefaction and power. We executed on long lead procurement in order to focus on speed to market with industry-leading OEMs. Now moving to Slide 28, and I’m going to run quickly through the financial performance for the fourth quarter and the full year 2023. Total segment operating margin was $427 million with $372 million of that coming from volumes that we sold through our terminals to our customers. We had $1.36 per share in the fourth quarter and $3.56 per share for fiscal year 2023. The punch line here is not only the magnitude of earnings but the quality as well. In the second half of 2023, 100% of our earnings came from sales to downstream customers or vessel charters. Finally, turning to Slide 29, on the left side of the page, we’re including a table showing the expected funds from operations for 2024 is around $1.25 billion, less the $250 million of net CapEx that was discussed earlier, which is around $1 billion that can be used to pay down debt.

Chance Pipitone, Managing Director of Strategy and Investor Relations

Thank you, Chris. Operator Lisa, would you please take a moment to receive some questions, and let’s open up the lines.

Operator, Operator

Thank you, sir. Our first question comes from Chris Robertson with Deutsche Bank. Please go ahead, your line is open.

Chris Robertson, Analyst

Hey, good morning Wes, hey guys. Congrats on the strong quarter-over-quarter performance here. Wes, just given the step change in the adjusted EBITDA that we've seen over the last two quarters, it’s obvious that the Puerto Rico power generation contracts provide quite a meaningful uplift here. There’s been some public filings and reports around FEMA wanting to wind down its involvement as early as mid-March. Can you just speak broadly to what’s happening with regards to FEMA, what this means for the current contracts, any potential sources of income and cash related to those assets, and more importantly, what’s the longer term growth opportunity in Puerto Rico on the fuel switching side?

Wes Edens, Chairman and CEO

Yes, that’s a great question, and I’m going to turn it over to Brannen to answer. There’s actually been a fair amount of public statements, both with regards to the power plants as well as the gas contract and whatnot, and so let me have Brannen address it.

Brannen McElmurray, Managing Director

Yes, thank you Wes. Great question. I think it’s best to kind of start with the facts. We have in place now two two-year contracts that we’re about halfway through. Those in the aggregate support 350 megawatts of operational power but 425 megawatts of installed power. The good news is if you look at the statements out of the Puerto Rican government, there’s been an agreement between the Government of Puerto Rico and FEMA to have these units remain and for the governor of Puerto Rico to purchase them.

Chris Robertson, Analyst

That’s helpful, Brannen. Could I just ask a follow-up? Just a follow-up on that in terms of the conversion opportunity on the gigawatt of power that you mentioned. How many plants is that spread across, what type of timeline would that be in terms of just the conversion opportunity?

Brannen McElmurray, Managing Director

It’s three to four, depending on what you want to consider the current state of affairs, and I think like all good development plans, there are near and medium term opportunities. So the fortunate fact is there happen to be a few opportunities that are gas ready today, and so they simply need a fueling solution, which we think is in process. Then there are medium-term opportunities that can last anywhere from nine to 12 months in terms of converting an existing plant to be gas ready.

Wes Edens, Chairman and CEO

The longer-term plan is simply more gas for both this plant, as well as others that will get converted at perhaps a lower price than the emergency power, but on balance our guidance for people is we expect that Puerto Rico will both continue as it currently performs for our system, and we think there is significant growth potential for both this, ancillary services and other initiatives that are underway, so it’s nothing but good news.

Sam Margolin, Analyst

Hi, good morning everybody. Happy Leap Day! Thanks for taking the question. A follow-up on Puerto Rico, because there are a lot of variables between a new price or a pro forma price and the new term, and then upside to volumes and whatever agreement you come to. But I think the most salient question we get from investors on the inbound side is, is there any scenario where the business model in Puerto Rico changes because of a FEMA negotiation and re-contracting, but the balance sheet and the leverage ratios are affected?

Brannen McElmurray, Managing Director

Yes, this is Brannen. I’ll take that. I think it’s important if you look at what Puerto Rico itself is saying, they are moving through a process where they will acquire the 350 megawatts that we built. I think from an expectation standpoint, that transaction will need to close in the near term and make those units permanent, so from a mechanical standpoint, we will receive cash proceeds for that.

Wes Edens, Chairman and CEO

Yes, also we are halfway through a two-year term of those contracts, and so while I understand there is interest on people’s part to understand what will happen at the conclusion of that, from our standpoint, we are a massive part of the energy solution for Puerto Rico.

Craig Shere, Analyst

Morning, thanks for taking the question. You’ve got this very attractive FEMA contract that’s kind of a sugar rush, but you’ve got all these great opportunities with Puerto Rico fuel switching and Brazil to fill in and go way beyond that with material downstream growth, but that requires upstream supply. My first question is more specifically, how do you think about balances sources and uses of LNG over the next two to three years?

Wes Edens, Chairman and CEO

It’s a great question. I think it’s very interesting, because I think that the question you pose is the opposite of what most people’s concerns are. I think most of the world is now concerned that since you’re roughly doubling the supply of LNG in the world by the end of this decade, the question is where is the downstream going to come to support that. In the short term, we’ve gone through a lot of investment and a lot of focus to get our own liquefiers up and running that address the short-term needs in the ’24, ’25, ’26, ’27 period, but beyond that, I think there’s more likely to be an abundance of supply than not.

Sherif Elmaghrabi, Analyst

Hey, good morning. Thanks for taking my questions. First, I guess a couple questions ago, this is kind of asking half of that a different way, but realizing the long-term goal of the integrated model to supply your own LNG to your own terminals, is there any reason why the company still couldn’t take advantage of LNG price arbitrage?

Wes Edens, Chairman and CEO

You know, we don't really view ourselves as the merchant business. We want to be in the business of full integration, so we integrate ourselves from liquefaction to transport to terminals to power our gas. Yes, I’ll let Andrew go through that. Maybe just spend one minute and talk about how the auction actually works, because I think that’s quite interesting.

Andrew Dete, Managing Director

Yes, sure. Thanks for the question. Generally, those auctions are decided the same day. They’re very transparent, they’re done on an electronic platform, you can see all the bids that happen. The way that we expect this to happen is consistent with history, which is in the next maybe couple weeks or month, they’ll announce the auctions, there will be a date associated with that - it will be sometime this summer. They’ll set a firm date for the actual auction. Let’s assume for a second that’s June 30, right? On June 30, they’ll run the bid electronic platform. At the end of the day, you will know if you’ve won or not and at exactly what price. Now to answer your question, when will that actually come online? We think this is going to be an interesting auction for that because there’s going to be two subsets of what happens, which would be existing generation and new generation, and we don’t know exactly how that. So for example if your plant has an existing PPA, you can still win this and then kind of contract out. But for plants that are not contracted today, the auction, the government and the plants are all going to want to start immediately, so that’s exciting and we think it will lead to new volumes in 2024 and early 2025.

Chance Pipitone, Managing Director of Strategy and Investor Relations

Thank you, Chris. Operator Lisa, would you please take a moment to receive some questions, and let’s open up the lines.

Operator, Operator

Thank you sir. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.