NET Power Inc. Q3 FY2023 Earnings Call

Good morning, everyone, and welcome to NET Power's third quarter 2023 earnings conference call. With me on the call today we have our Chief Executive Officer, Danny Rice; our President and Chief Operating Officer, Brian Allen; and our Chief Financial Officer, Akash Patel. This morning, we issued our earnings release for the third quarter of 2023, which can be found on our Investor Relations website, along with this presentation at ir.netpower.com. During this call, our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statement. With that, I will now pass it over to Danny Rice, NET Power's Chief Executive Officer.

Thanks, Bryce. Hi, everyone, and welcome to NET Power's third quarter 2023 earnings call. I'd like to briefly revisit our strategic initiatives before I turn the call over to Brian for some key operational updates. Our three-pillar strategy, which we outlined on our inaugural earnings call, serves as a framework to measure our progress towards achieving clean, affordable, and reliable energy. As Brian will speak to shortly, we're working towards not only demonstrating our patented technology at the utility scale, but also towards creating a standardized plant design that will allow us to get to manufacturing mode as efficiently as possible by the end of this decade. Simultaneously, we continue to make great progress towards building out our project pipeline, which I will touch on further in a few minutes. This technology opens an incredible universe of opportunities for us, and our first plant will ultimately set the stage for future deployment, and it's of the utmost importance to get our first one right. We're taking a methodical approach to ensure that this first utility-scale project validates the technology while operating with a focus on clean, reliable, and safe operations. NET Power is on a mission to lower the cost of power and lower the emissions from power without sacrificing reliability. The world is beginning to see that for energy to be sustainable, it needs to be clean, more affordable, and more reliable. Natural gas has been proven to be the go-to energy source to meet our reliability and affordability needs, and we need technologies like NET Power to eliminate CO2 emissions in the most cost-effective manner possible. So with that, I'll pass it over to Brian for some operational updates.

Thanks, Danny. The NET Power team is diligently progressing the development of our technology, which includes several facets. First, we are advancing and optimizing our process design to ensure that we can deliver the energy trifecta. Second, we're preparing and retrofitting our La Porte demonstration facility for upcoming testing campaigns with our partner, Baker Hughes. And third, we are developing our standard utility scale plant design through our front end engineering and design or FEED work with Zachary as we progress Project Permian, our first utility-scale plant. As mentioned on our previous earnings call, each of these areas of technology development are linked and are in development in parallel with the ultimate goal of delivering the energy trifecta at the utility scale. Slide 5 provides some Q3 updates from our La Porte test facility. We have several site developments underway in preparation for upcoming combustor and turbo expander demonstration tests with Baker Hughes. The initial phase of these testing campaigns begins in 2024. These test campaigns will help de-risk our first utility-scale project and create further refinement of our plant controls architecture with Baker Hughes equipment. The development at La Porte includes recycle CO2 compressor relocation, piping and instrumentation enhancements to improve data acquisition, and distributed control system updates to optimize our plant controls. Turning to slide 6, we progressed several important workstreams surrounding Project Permian during the third quarter of 2023. We continue to advance through the FEED process with Zachary, our first prequalified engineering, procurement, and construction partner. We completed our initial surveying and environmental assessment of our plant site, continued releasing bid packages for long-lead equipment, and commenced negotiations of supply and offtake agreements. During the second quarter of this year, we submitted our grant application for up to $270 million to the US Department of Energy's Office of Clean Energy Demonstrations. This process is ongoing with the DOE decision expected in Q4 of 2023. As Danny alluded to, it is critical that we get Project Permian right. Our anticipated project timeline is illustrated on the bottom right-hand side of slide 6. The global energy supply chain continues to be challenged, which means we are facing extensive lead times across critical components. Our supply chain strategies are intended to alleviate these market constraints in the long term, but we must prudently incorporate the current supply chain realities into our project timing and planning for Permian. As such, we are incorporating a 12-month cushion into our expected schedule for Project Permian. We're expecting to achieve initial electric power generation sometime between the second half of 2027 and first half of 2028. We believe this updated schedule will allow us to accomplish safe, clean, and reliable operations and enable this project to serve as the catalyst for all future NET Power plant deployments. I'll now pass it back to Danny for a few commercial updates.

Thanks, Brian. Turning to slide 7, we're actively building out our project backlog with the goal of creating clear pathways to state-level decarbonization by the time our first plant comes online. This process requires careful planning and strong alignment across our stakeholder ecosystem, which is illustrated on the right-hand side of this slide. Through our origination efforts, we continued to identify highly economic prospective plant locations where the subsurface is conducive to CO2 sequestration and the electricity transmission network exists above ground in regions with attractive spark spreads. We then formed the right partnerships to secure access to these locations, all while ensuring benefits to each and every partner and stakeholder. The ultimate goal is to maximize the energy and social benefits while minimizing NET Power's environmental impact. Using this all-encompassing approach, we've identified our first originated project, which we're simply calling OP1 for now. This project has completed its technical feasibility study, and we're preparing to commence permitting and FEED in 2024. Over the coming quarters, we're going to build stakeholder support with the intent of sharing details of the project once all key stakeholders are aligned. I want to reiterate that we're not looking at one-off projects on a bespoke basis, but rather creating a roadmap to future deployments within the same region with the goal of achieving net-zero grid at the state and regional level. I'll now pass it over to Akash to walk through our Q3 financial results.

Thanks, Danny. Looking at slide 8, NET Power ended the third quarter of 2023 with a strong balance sheet, including approximately $645 million of cash and short-term investments. For the quarter, our total capital expenditures, excluding short-term investment securities, were approximately $3.4 million, comprised of approximately $0.9 million spent on La Porte upgrades and roughly $2.5 million of capitalized costs associated with the ongoing Project Permian development activities. Under the current interest rate environment, we are able to benefit from putting our balance sheet cash to work to materially offset our corporate spend. In the third quarter, our cash flow from operations was approximately zero due to the cash interest received during the quarter of approximately $8 million offsetting our operational cash burn. Though, we do not expect this trend to continue as we build out the organization and ramp up activity at La Porte, we believe we have sufficient capital through Project Permian commissioning. Our overcapitalized balance sheet provides us with a unique competitive advantage and is a key differentiator for NET Power relative to other energy transition names. The final slide of this presentation provides the detailed breakdown of the company's fully diluted share count of approximately 247 million shares as of September 30. This is comprised of approximately 211 million Class A and Class B vested shares currently outstanding, 19.5 million shares issuable upon the exercise of outstanding public and private warrants, 1.7 million shares subject to earnouts or vesting requirements, and over 14 million authorized shares issuable pursuant to the joint development agreement with Baker Hughes. That concludes our prepared remarks for this call. We'll now turn it back to the operator to open it up for Q&A.

Good morning. I wanted to ask first about Occidental, and maybe you could speak to your potential participation in their future DAC projects. They spent a lot of time on their conference call talking about the South Texas DAC hubs.

Hey, Marty, this is Danny. Thanks for joining us today. We can't speak to anything specifically about Oxy and carbon engineering and DAC programs specifically. I would say more broadly, when you look at DAC and DACs have certainly gotten a lot of attention and capital these days. I think one of the really interesting things about our solution, as you look at just DACs, is that they need a lot of power. And I think one of the things that’s so interesting about what NET Power can provide is DACs need that power to be low cost and reliable because you have to be running these machines continuously 24/7 to be able to justify the capital costs of the DAC facilities. But you also need that power to be clean, right? I think you can't just use grid power, you can't use just straight natural gas from a combined-cycle plant, and you certainly can't use a coal-fired power plant for that power. And so you're really left with limited, if not zero options on economic and environmental justification for how you're going to power these DAC facilities. This isn’t specific to Oxy; this is specific to every single DAC project across the world, regarding how you're going to get access to low-cost, reliable, clean power. And there's really no option out there today in the world. And while I think we always viewed NET Power as the base case for NET Power, which is power going into the grid to decarbonize the grid and CO2 going underground, DAC certainly becomes a really logical second market for us where it’s power going into powering the DAC. And then you're actually combining our CO2 that's being captured from our plant with the CO2 captured from the DAC plant, so you pick up economies of scale in the CO2 infrastructure and you go sequester from there. So there's a whole lot of really good environmental and economic reasons why NET Power aligns really, really well with DAC. And so we're really excited to explore those in the future with Oxy and with other folks.

Great. And for my follow-up question, just wanted to ask about the building in of the additional 12-month cushion. Are there specific pieces of equipment that maybe cause you some concern regarding their supply that cause that cushion to be necessary?

Hey Marty, this is Brian. It's not about a specific piece of equipment but rather a broader issue affecting the energy industry as we emerge from the post-pandemic period. For example, something like a transformer, which I used to consider a commodity item, is now taking much longer to procure. The pre-FEED schedule we created a few years back had bids for this transformer expected within a year, but now it looks like it will take about three years. Electrical gear has become a major focus area that I previously saw as more of a commodity, and this concern extends to all items with long lead times in the air separation plant and Baker's rotating equipment. We realized that while we can expedite one or two items, it's important to acknowledge the overall trend in the supply chain and reflect that in our schedule.

Yes, hi guys. I was hoping to hear a little bit more about the OP1 project. Can you guys talk about this being your first originated project? I presume that's something that kind of NET Power went off and sort of found on their own. Are there other partners kind of committed to this yet? Or are you still sort of in the process of kind of bringing those partners in? I'm just trying to understand a little bit more about OP1.

Yes. Hey Leo. It's Danny. Good to hear from you again. Yes, I mean, it's early days, I think as we alluded to on the call last time. We really talked about being able to supplement the primary business model on the commercial side, which is licensing with this origination approach. The whole background on origination for new listeners on the call today was, we really have started to map out the United States but North America in general. One of the interesting things that's really unique to North America is the power markets where there are sedimentary basins, we can sequester CO2. They are deregulated, which means anybody can build a power plant and sell power into those grid systems. When you look at both the surface, the subsurface, and the power markets through the lens of NET Power, you really start to identify these really cool bright spots. And it's bright spots that we're sitting here today saying what's stopping us from going out and originating projects on our own in the best markets where these plants make really, really good economic sense? The answer is there's nothing stopping us other than the willpower and the conviction to go do so. That’s what me and the team have been working on for the last few months is really starting to map all this stuff out. OP1 is really the first of what will be a lot of these projects. I think as we think about just talking about the details of these projects going forward, it’s really important to us that we're very judicious and prudent about being very transparent about all the details of these projects only when the project is fully baked. By fully baked, I mean we have alignment with local landowners, communities, and regulatory agencies, both within the state and at the federal level. It's important to note that we have alignment with local utilities and any other folks that we need to help on the CCUS side, whether it's on CO2 transportation or sequestration. We’ve seen what happens if you announce projects before they're fully baked; you risk opposition. Therefore, we will build support so that people really understand the broader social and environmental benefits of what these projects can do. OP1 will be the first of a bunch of projects that we're working on right now. The goal really is that by the time our first plant comes online, we will have a substantial backlog of projects.

Okay. Very thorough answer for sure here, Danny. It certainly sounds like to paraphrase a little bit it's a bit early days and there's probably still a lot that kind of needs to happen to get all the right stakeholders and investing partners in place here, but it sounds like you guys are well on your way and working on a lot of that.

Yes, that's right. The key pieces, these are going to be economic and socially beneficial projects that folks want to be a part of.

And then just a question on kind of the financials here. I know it's always a little tricky to kind of critically evaluate things going forward. But as I'm looking at your third quarter numbers, it looks like if I just add up G&A, sales and marketing, and R&D expenses, that looks like your cash cost is around $17 million, $18 million here in the third quarter. Is that the kind of run rate we should expect as we roll into the fourth quarter in 2024? Or do you think there's going to be some fluctuation in those costs next quarter and into next year?

Leo, I'll take that. It's Akash. I appreciate that our presentation of financials is a little different than just the standard, given the reverse purchase accounting that happened. But if you look at the cash flow from operations that we've posted year to date in the third quarter versus the year to date in the second quarter, that effectively gets you the cash burn of the company for the third quarter, which was approximately positive $100,000. The income statement includes a few non-cash items, particularly around the Baker Hughes joint development program. That program is half cash and half shares, so you see the shares funded every quarter, but only half of what is actually the cash burn hits the income statement. We had roughly $8 million of interest income come in during the quarter, which offset the operational cash burn. Thus, we believe we have ample capital for the testing, as well as getting us through to when the project comes online.

One thing that has become more pronounced in the last few months on the sequestration side is from specifically the oil and gas industry players that are looking for storage-only type transactions in CCS. I've been hearing them talk more about there being an increased land grab mentality out there about just securing access to and control of pore space. I was just wondering if that was anything that you are perceiving in your marketplace.

Yes, this is Danny. No, it's a great question, Noel. I think, when you take a step back and look at where a lot of the CCS activity is happening, almost all of it is in and around areas with high concentrations of CO2 coming off industrial plants, operating primarily within the Gulf Coast region from Louisiana into Southeast Texas. With NET Power, we are different because we are the source of CO2, and we can put our plants wherever the sink is, regardless of whether there's CO2 in that region or not. All we need is access to the grid and access to natural gas infrastructure. So we're looking at parts of the country that no one else is considering because there are no CO2 emissions in those areas. This creates an opportunity for parts of the country that right now we think are struggling to get to net zero, not having great wind or solar potential.

Yes, sure, Noel. This is Brian. Nothing unexpected. I think anytime you change turbomachinery, every OEM has different strategies on things like how they cool the third turbine or how they start in lignite. We have to account for those in our plant design or plant controls, which is great. So we're making those controls updates, which will then port over the long-term to the utility scale design because that turbo expander and its turbomachinery will have a similar architecture and strategy. So again, there's always more to learn as we designed the plant originally, but we're seizing the opportunity to upgrade our data acquisition for better analysis of the cycle.

Good morning, everyone. Thank you for taking my questions. I guess just to go back to the supply chain constraints that you kind of discussed earlier in the call. Any update you can give us on cost for SN1 or even more broadly as you think about the OP1?

Yes, this is Brian. I'll address the first one. So we're still in the middle of the FEED with Zachary. We're getting initial information from long-lead suppliers, but we're not yet at a point where we've really gotten firm negotiated bids that will keep progressing through the FEED, probably all the way through mid-next year. Certainly, it's something we're watching. I'll remind you that we're also in a value engineering and optimization exercise. Our cycle sets the entire plant design, and there are things we can change and trade-off. So as we keep continuing with the FEED process with Zachary and interface with Baker on major equipment, we are really optimizing the overall plant design.

Yes. So I think it's really interesting. If you look at just the schedule that we have right now for Project Permian online in '27, beginning in '28. OP1's going to be positioned to follow along closely. Those are being positioned assuming we can get the requisite Class II Class VI permits in place. You could see where projects are ready to go, like ready to be turned online shortly after serial number one. The short answer is that you could see OP1, OP2 online a year after Project Permian. But it's up to us to ensure we have confidence in the project's expected performance before we order equipment. The nice thing is because Brian and the team are designing this to be a standardized plant design, it allows us the ability to be opportunistic with our backlog and timing.

I think that makes a lot of sense. One more, if I could squeeze it in, anything cooking internationally that you can speak to?

The pot's boiling. We're getting ready. Yes, there's substantial interest. We’ve talked about when we were completing the destocking, and what is the recipe for success? You need access to low-cost gas, a good place to store CO2, and a lot of power demand. When we look internationally, Western Canada has all three; the Middle East is exciting. Southeast Asia, where we’re forming a joint venture with SK Group, is also interesting. Parts of Australia are appealing too. Europe has its own challenges with reliance on external energy sources, but it should make great sense with successful CO2 storage demonstrated in the North Sea.

Good morning. Thank you for all the helpful comments today. Just a question on CO2 transport. One of the major proposed CCS pipelines was canceled last month largely because of regulatory issues and local community pushback. I know you're focused on short-distance transport of less than 40 miles. Are there any lessons learned there? And how do you limit your risk in your CO2 transport strategy?

Yes. Hey, Betty. That's a great question. Infrastructure challenges and local opposition are common concerns for any infrastructure project. We've learned that just because something is good for the environment, it doesn’t guarantee a social license to operate. It’s important to be good stewards in the communities we work with. We ideally want to minimize infrastructure by placing the plant adjacent to the electricity transmission line and the sink below. We're not trying to build extensive pipelines. In fact, Project Permian has existing CO2 infrastructure, thus minimizing execution risk for project one and future projects.

Great. That's really helpful. Thanks. And then a quick follow-up regarding your comments earlier about lead time for the OP1, 2, or 3 projects relative to Project Permian; how long would it take for you to move on the next project?

Yes, I’ll take one part of it, then Brian can discuss the equipment side. We are focused on securing the necessary permits and subsurface rights, which typically can take four to five years for Class VI permits. Those are long lead items. Setting the table early benefits Brian, allowing the team to go forward with projects once everything is secured. Brian?

Yes, I think that's where this ties nicely with our three-pillar strategy. As we execute with our current partners, we're not discussing on a transaction basis but aiming for a manufacturing mode for future projects. Our discussions with suppliers are based around our expectations for further deployment and opportunities. This setup should help us alleviate long lead times and smoothly transition into manufacturing mode for the next projects.

Good morning. I hope to follow up a little bit more on the international front. How do you see the permitting or execution timeline differ as you pursue different geographies?

Yes, hey Ryan. When it comes to permitting, both state and federal approvals are involved. Regarding Class II permits, the process is quick across many states, while Class VI permits might take longer, especially with the EPA facing an influx of applications. They're trying to reduce wait times, which is beneficial for NET Power. Internationally, the process can be faster since many structures are centralized. We plan to leverage the U.S. market but also see responsibilities globally regarding decarbonization. Yes, it is more attractive in the U.S. due to the low-cost gas availability, valuable carbon market, and the need for replacement of aging plants across the grid. Thanks, everybody, for joining us today. Those were really good questions from the investor community, and we hope you continue to engage as we build this company and deliver the energy trifecta. We appreciate everybody's support and look forward to speaking with you next quarter.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.