New Fortress Energy - Q2 2024

Transcript

Operator (participant)

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.

Chance Pipitone (Head of Investor Relations)

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 will 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.

Wesley Edens (CEO)

Great, thanks, Chance, and welcome, everybody. 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 you 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 target of 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 nineteenth, 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 is material and had a big impact on the quarter that recently concluded. As I said, the good news is the project is up and running and has 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. And 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. So this is 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 got this online in July. We don't expect to get full production of this until the first of September, and thus it'll be somewhat reduced from the 275 goal. Q4 is a full quarter's production of $275 million. The FEMA claim that we'll talk about in just a few minutes with Brannen will bring us up to total EBITDA expectations for the year with a range of $1.4 billion-$1.5 billion. Guidance for next year is $1.3 billion. Basically, that is just the existing volumes and customers, plus the Nicar- 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's 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 material, materially, which Andrew Dete 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 TBtu. 50 TBtu equals one ton of LNG, so we have a current supply in our portfolio of approximately 3.5 million tons for next year.

The 5 countries shown and the net margins are a weighted average of our various customer contracts. They range between the countries from $4.5-$8 in margin. In general, this is a function of the proportion of the capital we invested in order to achieve these results. Simply, in simple terms, in those markets with 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 $100 million per 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 the arithmetic behind the FLNG One 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 TBtu. 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. 7 times 70 equals 490.

Using our own facility and ships greatly reduces our logistics cost by $100 million, which then adds to $590 million, or roughly $150 million a quarter. Pretty simple math. Flip to page 7. Operationally, we had a terrific quarter, highlighted by the FLNG 1 putting to service. First cargo was actually transferred early this morning. Planned maintenance starts tonight for 7 days, and we expect full production shortly thereafter. Completion of FLNG 1 triggered the FLNG 2 financing, which is entirely equity financed 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 a-- 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 an 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'll come as a result of that. With that, let me turn it over to Andrew. Andrew?

Andrew Dete (Managing Director)

Good morning, everybody. Thanks, Wes. I'm on page nine for a similar update on Brazil. Two big assets that we wanna check in on that are a big part of our kind of future growth and future projections here. The first is the CELBA 2 Power Plant. That's our 630-megawatt power plant with a 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. This is 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 commence cash flows in the second half of next year. 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 2 different cargoes loaded into Barcarena already. So we're operating very well, and everything's going great in Barcarena and CELBA. To the right is our Portocém project. So this is the project that we acquired in December, and we've made great progress since then. So 1,600-MW 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.

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 Barcarena terminal. Gas volumes are up to about 60% of the contract demand as we commission the boilers and the calciners of their Alunorte alumina refinery one by one. We expect to be at full ramp-up on that contract by October of this year, and Barcarena is really coming together very well. I'm flipping to page 10 for a bit of a further update on Brazil. There, there's two other things we just wanna 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 Barcarena 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 GW 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 3-5 years. I'm gonna move next to the structure and 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. 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, you know, be in the market here soon to kind of get the best execution on that refinancing that we can. Second, is we're gonna target less than 4x 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 kinda 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 kinda 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 debt to EBITDA. And then in 2026, when Portocém, Brazil, and other assets turn online, we'll continue to grow that EBITDA and be below four times debt to 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 wanna walk through is basically how we're gonna kinda continue to create more overall cash for debt service to deleverage, and then more, of course, free cash flow available for, for equity holders. And the first thing to kind of, you know, make that point is to show our CapEx.

So, page thirteen is a CapEx overview for the remaining part of 2024 and then into 2025. The key point here is obviously we're done with FLNG 1, 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, you know, about $128 million of net CapEx through the end of the year. And then we have CapEx on FLNG 2, which is also here as well, netted against the term loan that we have for FLNG 2.

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 available for debt service. So the, 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 $1 billion of adjusted EBITDA, and we end up with $683 million of cash, 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, at $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 sort of corporate loan leverage to asset-level leverage. And 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. 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. 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. We expect almost $4 billion of enterprise value in 2026, which is a simple 8x 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. Then we assume we can get to basically, you know, 50%, LTV on that, so another $1 billion of leverage. That, together with the FLNG one 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.

Wesley Edens (CEO)

Great. Thanks, Andrew. So, let's talk about our new, our new initiative, which is really just a continuation of an existing business that we've had around here for many, many years. So flip 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 nine gigawatts of power between La Paz, Mexico, Puerto Sandino, our new project, Jamalco in Jamaica, Puerto Rico, of course, and then in Barcarena, Brazil. We are a global leader in power systems development overall. We own or have visibility of two 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 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 base load 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 gonna talk about this modular design, what we believe is the impact that we can achieve here in the United States on in assisting data center tenants.

But before I do that, I'm gonna turn it over to Brannen, just to pause right now and talk about this project and the, the FEMA contract and the claim, and, and then, and, and where we are with that right now. Brannen?

Brannen McElmurray (President and CEO)

You bet. Yeah, thank you, Wes. Really appreciate that. Just as a reminder, for folks on the phone, as Wes stated, you know, 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 MW 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, this particular power, 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 fifteenth, 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 were remaining to be owed on the contract, so $659 million fits 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 NFE 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 on page 19.

Wesley Edens (CEO)

Great. Thanks, Brannen. 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 3 or 4 or 5 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 and hyperscaler data center users would be similar, but actually, they are quite similar. If you flip to page 19, we formed a new company, we call it Klondike, that 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/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.

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 3-5 years and data center tenants need power now. Flip to 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 Brannen 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 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%+ in our experience in Puerto Rico, and you make it well over 100%. And you achieve then the five nines 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 on-site power, and the business is up and running. So step one is to identify a site with either a data center partner or on 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, we outlined—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 Wyalusing, Pennsylvania, which we acquired years ago.

We have a site in Shannon, Ireland, which is the site where we're intending to build a power plant that we have 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 spin 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?

Chris Guinta (CFO)

Yeah, thanks, Wes. Good morning, everybody. Let's turn to slide number 25 and talk through earnings for a moment. As you 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 ship 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 10-Q, 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 GAAP net income for the quarter, which was an $89 million loss, or $0.44 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 $0.03 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 $0.26 a share, and $142 million of funds from operations or $0.69 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, 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.

Chance Pipitone (Head of Investor Relations)

Thanks, Chris. Operator, if you would, let's open up the lines for some quick Q&A. Thank you.

Operator (participant)

Thank you. If you would like to ask a question, please signal by pressing star one 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. We'll pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question from Ben Nolan with Stifel. Please go ahead.

Ben Nolan (Managing Director of Research)

Yeah, thank you. So my first question is related to the FEMA 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, how you feel about, you know, how, how you come to that number and any flexibility on timing? Is this a 4Q event, or might it slip into next year? Any thoughts around that?

Brannen McElmurray (President and CEO)

Yep. Ben, this is Brannen. Thank you for the question. And probably what I'll use it as 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, you know, there is a very tried-and-true, you know, 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, et cetera, that you've made.

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, you know the math, it's measured in the $ billions.

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 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, you know, rules, it actually adds up to right around $659 million.

So that was put on a piece of paper with, you know, thousands of pages of backup, submitted to Weston. They in turn did their, you know, initial, you know, take on it. We had a little bit of puts and takes on that, but essentially the numbers 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, you know, 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 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.

Ben Nolan (Managing Director of Research)

Okay, appreciate it. And then, sticking with Puerto Rico for a second, and thinking about the incremental 80 TBtu island-wide side of it, that should be online in the fourth quarter, is there anything that 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 80 TBtu?

Brannen McElmurray (President and CEO)

Yep. So let me, I'm gonna 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, you know, because this is our strategy, is it actually needs 5,500 MW of power, right? That's the way to think about it. It peaks at 3.3 GW. You need about 700 MW of operational reserve, 900 MW of maintenance reserve, and 600 MW of generation reserve. That's what they need. Today, you don't have that.

So functionally, what's getting ready to happen is with our, you know, 2 power plants that we made available, plus the MegaGens that will be converted, plus Mayagüez that will be converted, plus the other projects 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, over time. As it relates to today, you know, what we are hyper-focused on are things that we can 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, is done, then that 86 MW-90 MW 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 cost, that are currently running.

Wesley Edens (CEO)

Yeah.

Brannen McElmurray (President and CEO)

Yeah.

Wesley Edens (CEO)

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 TBtu. Of that, about 150 of it is already contracted, right? Not including the upsize in the Puerto Rico contract. So your 88% of the 2025 results are essentially 100% contracted or 88% contracted right now. The incremental volumes that Brannen was talking about are, you know, the other 40 or so TBtu. 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 really literally no incremental risk one way or the other. Obviously, our goal long term is to serve customers, so we want to serve our customers there. As Brannen 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, you know, 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 place today, if that makes sense.

Operator (participant)

Thank you. And we'll take our next question from Greg Lewis with BTIG. Please go ahead.

Greg Lewis (Managing Director)

Yeah. Hi, thank you, and good morning, and thanks for taking my questions. You know, I guess I want to follow up on 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, you know, our natural gas exp - 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.

Wesley Edens (CEO)

We essentially have no exposure. As I said, we have a portfolio of 170 TBtu. We have current demand in hand for 150 TBtu 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 or manufacture LNG, right? We list there's a couple of portfolio purchases that we make on a long-term basis, then we have our own. We have long-term offtake 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 gonna make between $1.4 billion and $1.5 billion this year, notably with no additional FEMA dollars coming whatsoever. We think the number is $1.3 billion is the guidance for next year. And 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 $1.5 billion and growing EBITDA in the gunsights for it, with essentially no more CapEx spend to do it. So that's, 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 a 3-month time frame. We had a delay of a couple of months. Unfortunately, that happens. That's behind us. It now operates and 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 and longer term and lower cost debt over time.

The path to get there is incrementally just to perform as we have, and we'll go through it, and we feel, we feel really, really good about the prospects for doing that, you know, productively here in the very short term.

Greg Lewis (Managing Director)

Okay, and then just on the opportunity in Pennsylvania and Ohio, I mean, obviously everyone saw the PJM 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, you know, that area of the country? You know, I guess, how should we be thinking about that over the next couple of years and that opportunity?

Wesley Edens (CEO)

Yeah, I think that it is perhaps the best market for data center development, not just 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 Henry Hub 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 MW worth of power," they'd apply for a grid connection, they'd get it in relatively short order, they develop it and move on. They now go in for hundreds, if not thousands of megawatts, and that's a real problem.

So what you've seen is at PJM, and then at the utilities, AEP and others, are real backup. So what was previously maybe a 6-month or 9-month process, now can be a 3-year or a 5-year or 7-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 Brannen 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 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 Wyalusing 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 Talen power plant. So it gives you some sense of, like, you know, 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, the utilities around the country, we think that the timeline to get power could be 3 years or 4 years or 5 years. So go call your favorite hyperscaler, you know, 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, 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 with that. What we are very expert at is providing fast and low cost and reliable power systems.

That's what they need, that's what we have, that's what we think the opportunity is. 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 you have abundant supply of gas. Those two things together are a very, very powerful combination.

Operator (participant)

Thank you. We'll take our next question from Craig Shere with Tuohy Brothers. Please go ahead.

Craig Shere (Director of Research)

Morning. Thanks for taking the questions. So after Nicaragua, do you see further downstream growth in 2025, restricted by a dearth of economically contracted or internally produced LNG supply? And how do you see that changing for the better or worse into 2026, 2027?

Wesley Edens (CEO)

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 Ukraine-Russia conflict, but still, you know, reasonably high. So you think that Henry Hub, I think next year's forecast is to be around $3.50, add $2.50 is a good proxy for what would be the cost of it, plus an adder. So maybe that's a $6 cost to buy LNG in the marketplace long term. And the market is, you know, roughly, you know, six or seven dollars higher than that. It's $13, $13.50, 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 LNG 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. So 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 it's the $8 billion we've spent in developing our, 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, you know, Jamaica, those are countries that also have incremental demand. So we do 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, you know, over the next couple of years. So 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 $1.5 billion 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.

Craig Shere (Director of Research)

Okay. As a follow-up, you know, to your point, Wes, I mean, $2.5, you know, contracted netbacks long term for liquefaction. I think in one of your slides, the implicit was $3.5 effective netback, presumed value for FLNG. Is that $2.5-$3.5? Should we just see that basically included in the $7 average downstream margin, or do you see that additive in some way over time?

Wesley Edens (CEO)

No, it's actually it's basically included in the margin. Really, we think of the 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 the the 70 TBtu of production and look at it over the next couple of years versus market, it is over a $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 the the cost to to replicate it. And number two, just being in in business today and taking advantage of higher prices gives you the benefit of another $1 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've described the business, and in fact, the way the business exists, is just simply, you know, the amount of production that we have, the 170 TBtu at this time, times the margin of $7, that's what gives us the $1.2 billion + $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.

Operator (participant)

Thank you. We'll take our next question from Tarek Hamid with JPMorgan. Please go ahead.

Tarek Hamid (Managing Director)

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?

Wesley Edens (CEO)

We think it basically is very little in terms of capital intensity because the nature of the contracts are gonna be very, very long offtakes to very, very high creditworthy tenants. So we think it's we think it's a very capital light business, and basically one where we, you know, we'll sign a modest amount of capital for down payments on turbines or transformers or things like that. They're 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, of those those contracts.

Tarek Hamid (Managing Director)

Helpful. And then secondly, I'd just love any color you can give on sort of when you plan on starting to address the 2025s and 2026s, your senior notes. I think you'd said, during the prepared remarks, you had a commitment in hand on the 2025s.

Andrew Dete (Managing Director)

Hey, it's Andrew. Yeah, that's right. We, 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.

Operator (participant)

Thank you. At this time, I will turn the conference back to Wes Edens for any additional or closing remarks.

Wesley Edens (CEO)

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.

Operator (participant)

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.