New Fortress Energy - Earnings Call - Q3 2020

Transcript

Operator (participant)

Ladies and gentlemen, thank you for standing by, and welcome to the NFE Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star, then one on your telephone. If you require any further assistance, please press star, then zero. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Mr. Josh Cain, Vice President of Investor Relations. Thank you. Please go ahead.

Josh Cain (VP of Investor Relations)

Thank you. I would like to welcome you to the New Fortress Energy Third Quarter 2020 Earnings Call. Joining me here today are Wesley Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer; and Sam Abdallah, Vice President of Project Development. Throughout the call, we are going to reference the earnings supplement that was posted to the New Fortress Energy website. If you've not already done so, I'd suggest that you download it now. In addition, we'll be discussing some non-GAAP financial measures during the call today. The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Wes, I would like to point out that certain statements made today will be forward-looking statements, including regarding future earnings.

These statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements, and review the risk factors contained in our quarterly report filed with the SEC. Now, I'd like to turn the call over to Wes.

Wesley Edens (CEO)

Great. Thanks, Josh. Thanks, everyone, for calling in early on the 29th here. As Josh said, if you have had a chance to either pull up on your screen or download the management presentation, that will be what we refer to as we go through this. It'd be helpful to have it in front of you. So with that, let's turn to the beginning and start with page number four. We had a very, very productive quarter. This is our first full quarter in our COVID world. We had a number of initiatives when we started the quarter, and I'm happy to say that we actually achieved most of what we had set out to do. Starting first and foremost with production. So as we mentioned in our last earnings call, July 10th was a big date for it.

That was the date when both of the turbines turned on down in Puerto Rico. That basically was the moment that we kind of switched from being a development company to an operating company. And I'll go through it in just a second. But the bottom line is that we achieved record volumes, 1.8 million gallons per day for the quarter. Actually hit a peak in the month of September at about 2 million gallons. We're well on the way to being the cash flow enterprise that we set out to be. Second of all, the development for us of both our large-scale developments and our terminals, and then the smaller developments for our customers, also had a very productive quarter. Challenges, for sure, from the COVID environment. And there were some delays, but they're modest. And we'll have Sam go through them here in just a few minutes.

But the tagline is that basically on time and on budget for the most part. Very, very good news to report there. New business cycle, we have a lot to talk about, and I'll spend some detail on it when we get there. But basically, we have become very focused on kind of organizing our business into the organic growth of our existing terminals and new terminals, as well as then the new markets that we're targeting. We've hired a lot of people. We've actually put a significant amount of focus on the infrastructure build-out there. And I think the results are going to speak for themselves here shortly. Hydrogen, I'll talk a fair bit about it. I mean, the path becomes clear every day as to what we intend to do.

Our first two projects we announced in just recent days: first investment that we made in an electrolysis company, an Israeli company that we made a small investment in here a few days ago. Also established a joint venture to run hydrogen, create basically the first hydrogen-burning power plant here in the United States to give fuel data for us. That's great. There's a lot to talk about there. Then Chris can go through the finance and operations, of which there's a lot to, again, a lot to report on. With that, if you flip to the next page, page number five. July 10th was the date when both of the turbines turned on. For the most part, they have been running very reliably ever since. This is a photo that you see there. We were 1.4 million gallons per day in July.

In August, we then added one significant customer piece of business, which Jamalco in Jamaica, that's a bauxite company. They switched over their boiler operation from HFO to gas. So dirty fuel to clean fuel, that's a big win for the environment. Also was an incremental piece of business for us, and by September, 1.8 million gallons per day kind of running as we expected. If you look at page number six, it's a busy page, and it's not intended to be the cleanest presentation of this, but you can see on a daily basis that modest amounts of variability as our customers' needs go up and down, but the story overall is one of growing and also growing in diversity, and what's very important for our business are both of those things. We obviously want higher volumes, but we want more and more customers on our business.

That's what will create the cash flow profile and the reliability that we want as an enterprise. And the quarter was very good in that regard. So flip to the next section. We'll talk about the developments. I'll turn it over to Sam. Sam?

Sam Abdallah (VP of Project Development)

Thank you, Wes. And good morning, everyone. Our business is about terminals and customers we supply from those terminals. Currently, we have three terminals in operation and two terminals under construction. The two under construction, and I'm moving to slide number nine, are largely on track, and we achieved significant milestones. Talking about the La Paz, the Mexico terminal, we encountered a couple of months of delay because some of the government offices were closed between March and July due to COVID. The project is on track right now. We have 110 people on site currently. By next month, we will have 150 people on site. And the completion of the terminal will be by mid-December of this year. And the power plant completion will be by end of Q1 next year. We also realized there is an increasing demand on power in La Paz and in Baja in general.

We filed for a new generation license. We achieved and we got the preliminary approval from the authority. We went ahead and bought new land. We filed for the permit, and we actually received the construction permit for the new land last week. We'll keep you posted. We are not sure what will happen with this, but it looks very promising. Moving to Nicaragua, the project is on track for completion by Q1 of next year, end of Q1 next year, or early Q2. We signed the port concession in Nicaragua. We bought the land for the power plant, and we finalized the engineering and filed for the permit. This week, we finalized the EPC contract with the power plant contractor, and they are mobilizing to the site next month. Moving to slide number 10.

Our customers, large or small, they need gas and power. For the gas, we supply them from the existing terminals, and for the power, we fully finance the solution. We currently, for the small scale, or what we call them the organic growth, we have 24 customers in operation and nine under construction. What you will see in the picture here on slide number 10, this is the Bimini project, nine megawatts installed, about average of 11,000 gallons per day, and we turned on this project a few weeks ago. We are proud of this project because it's a small island luxury resort, and there are a lot of islands in the world, so this is a great proof of concept for what's coming, and especially in the Bahamas.

We also, this last quarter, we turned on the first two small-scale customers in Puerto Rico, the Coca-Cola facility and the data center for Banco Popular, the largest bank in Puerto Rico. What we also would like to highlight, out of the nine customers under construction right now, is our first client, our first small-scale client in Baja, which is the Four Seasons Resort in Los Cabos. Once all these nine customers are online, which we expect by end of the year or early next year, we will have for total small scale about 190,000 gallons per day of production. Now, moving to slide number 11. And this is about the ISOFLEX. As a quick update on the logistics for the ISOFLEX, we hired the former COO of publicly traded offshore supply vessel company. And he brought a very talented team with him. They opened the office in Louisiana.

That will be our office to manage this part of the business. The team purchased the OSV, our first small ship, which we call it NFE Zero, and identified two barges that we will purchase within a couple of weeks. The manifold, our proprietary manifold, is also under construction for completion by December of this year.

Wesley Edens (CEO)

Great. On the following page, there's a cartoon that we showed before, which demonstrates kind of how this all works. And bottom line is that we think that this is a real game changer. Basically, by using ISO containers and filling them up from the big ship and then bringing them to shore and offloading them with just cranes and typical kinds of equipment you'd find in ports already, we've basically skipped a step of having an intermediate ship. That reduces our CapEx by about 50%. It reduces our OpEx by about 50%. It takes the time to deliver from 24 to 36 months down to three to six months. So it's a huge change across that. The first two places we'll deploy this will be in Nicaragua and in Mexico.

And you'll see this will transform from a cartoon showing this process to actual performance here in just a few months. So it's a big deal for us. Flipping real quickly to the new business side on page 14. As I mentioned earlier, we reorganized our sales into two distinct functions: the organic sales groups with our existing terminals and then new terminals and then targeting around the world. We've added more than a dozen new people. The build-out of the origination network for us across the world, we think, is a significant step for us forward as an organization. And I'm very happy with the people that we have brought in. The organization that we've created, I think the results will speak for themselves here shortly.

If you look on page number 15, just to take a quick look at what organic growth really means, here are the five terminals that are under construction or up and running right now. You can see the utilization rate, if you circle that at the bottom of the page, 29%. It means that 71% of the terminals are still available for new customers. That translates into total capacity of another 8.2 million gallons per day. If you sold all that at our average margins right now, it would generate another $1 billion in P&L for us. So huge opportunity for us. And you're at a huge competitive advantage. We already have the infrastructure built. We already have the logistics in place. We already have the personnel. All we really have to do is just go to our customers, execute with them, and get them online.

This is a big focus for us. It's the best business that we can do. There's lots of things that we think are likely to turn up here in the next months and quarters. But organic growth is clearly going to be one of the real engines of growth for us, cash flow-wise, next year. Page 16, the near-term pipeline for our business is actually significant. But what we have done in our reorganization of our origination folks is become very focused on key markets. There are six countries in particular around the world that we think have got the characteristics that are the most ideal for our business. Of course, there's the several hundred companies in the world. We think that two-thirds of them need our services in one form or the other.

But there's a handful, a relative handful that actually have got, we think, the characteristics that will have the biggest impact for us. Those three characteristics are, A, large populations, B, significant existing power infrastructure, in particular, existing thermal power that can be converted, and three, significant opportunities for economic growth, especially once the COVID time has passed. So these four circles I show you, there's eight different transactions that we are in the middle of right now. As you can see, there's a real push to the right-hand side. When you look at LNG flows around the world, about 75%-80% of all LNG goes into Asia. So it's no surprise that when we look at areas that we think have got the most promise, that's where we are. But Central America, South America, Africa, Asia, there's a tremendous amount of opportunities there.

Our goal is to be FID on two new projects between now and the end of the year. There's only a couple of months left in the year, but we're down the path on a number of things. And I think we've got a good opportunity to bring two of them over the finish line. And then the goal for next year is 5 to 10, with a real target as a company to be 20 to 30 terminals over the next five years. Turning to hydrogen a little bit. And I put a number of slides in here. And I'll go through this briefly. But this is my kind of reset in terms of how we think about the business. Page 18. On the left-hand side here, the first thing to give a little bit of context is how big is the market for hydrogen today?

We all talk about how big we think it can be and what a transition fuel it can be in terms of helping us get off fossil fuels as a world. But how big is it today? 100 billion kilos of hydrogen are sold every year right now. So at an average price of about $1.25 a kilo, that translates into a hydrogen market today that's $125 billion. Just to give a little contrast, the LNG market today, which is about 360 million tons at about $5 in MMBtu, is about $90 billion. So this will come as a surprise to many people. But the actual hydrogen market today is actually 30% bigger than the LNG market is today. So huge market that exists right now. Where does it all come from? It comes from a couple of different methods: steam methane reforming and coal gasification.

In particular, you can see that electrolysis is a very small part of it. All you really need to know about steam methane reforming, SMR, and coal gasification is it produces hydrogen, but it does so in a very, very dirty fashion. Basically, 11 kilos of CO2 created for every kilo of hydrogen with SMR, 22 kilos of CO2 created for every 1 kilo of hydrogen created by coal gasification. What does that mean in the world? It means that to produce hydrogen, which is the cleanest of all fuels, it generates 2.5% of all global emissions. So it's a bit of a disaster from an environmental standpoint. That's the bad news. The good news is there's lots you can do about that.

If you look at page number 19, just again, to give a little bit of context, the hydrogen that we are looking at in our projects can come from three basic feedstocks. One, water, obviously, largely free. It's not exactly free, but we put it as free because that's essentially what it is. It can come from gas or it can come from coal. Those both have chemical compositions that are actually able to create a lot of hydrogen if they're broken up properly. The production technologies, we've looked at over 150 companies. So we've seen a lot of different production technologies. There are really three different types here: electrolysis, which is the process to take water and split it into oxygen and hydrogen, methane pyrolysis, and coal pyrolysis. All you really need to know is that these are processes that use significant amounts of heat.

Although they are similar to the technology that they're used right now, the significant difference is they can be made entirely clean, we believe. I'll talk about that in a second. The best price at the bottom here, I draw lines under just for reference. What this really represents is our view of if everything worked perfectly in the world, which of course it doesn't, what is the theoretical price at which you could create hydrogen. Water, $0.80 a kilogram. That's basically $0.02 continual power, 100% efficiency of your electrolyzer. Gas through methane pyrolysis, $0.60 a kilogram. Coal, $0.20 a kilogram. That's the one to actually draw a line under because there's a little bit to talk about there. Look at page 20. When we try to dimension the problems and what we're trying to address, what's our focus?

Three sectors: power, industrial, and transportation combined to about 80% of all emissions. So in very simple terms, it wouldn't be perfect. But if you could actually turn those three sectors from burning dirty fossil fuels to burning clean hydrogen, you'd go a long way towards cleaning up the CO2 in the atmosphere for us. So on the right-hand side, I put a box together that just shows you and dimensions what the relative competition is of fossil fuels versus hydrogen today. So I said, if we were able to generate hydrogen at $1 a kilogram, right, to convert that into an MMBtu equivalent, just multiply by 7.5, well, power today, look at power in the United States. Henry Hub, which is an index which natural gas is sold, is about $3.

Say, it costs them $0.75 in transport cost to get that natural gas into their power plant, $3.75. So what that means to me when I look at this is that even in our kind of "best case scenario" using kind of conventional electrolyzers, we're still about 50% higher in price with hydrogen than we are with natural gas. Industrial, as I said in that earlier page, the average price that is paid for the industrial hydrogen that's created is about $1.25. $1.25 times 7.5 is about $9.50. So the dollar versus the $7.50 for hydrogen versus $9.50 could be competitive, again, in the best case. Transportation, there's a big gap there. I put an asterisk next to it because that is before the cost of logistics, which is a big deal, right?

So in order to get basically hydrogen to people in service stations or in gas stations or in trucking stations or whatever around, there's a significant cost to that. And so while you look at these two, you say, on paper, day one, the electrolyzer could have the biggest impact potentially on transportation. The other two is actually simply not good enough. The goal then is actually very simple. Either you have to find a way to make hydrogen at roughly 50% lower than what we think is the best case, or the governments have to step in and do one of two things. They have to either subsidize the production cost of hydrogen, bringing it down so it's more in line competitively, or they have to put a tax in place on people that are burning dirty fuels.

When they say carbon tax, what I really mean is make it more expensive for people to burn those dirty fuels so that our fuel is more cost competitive. And those are both things I think the government could and should consider. But without that, if you want to just take care of it yourself, then you need to actually produce it cheaper. So page 21, the goal is actually very simple. It's zero emissions. And something that's become very clear to me is I think the way that we characterize hydrogen and its production, in my opinion, is not really correct. We say that electrolysis is clean if the power comes from a renewable source. In other words, as I say, it's the Hippocratic Oath of hydrogen, first, do no harm. It's that if you're not creating emissions, then therefore it's clean. And so we call that green.

But the characterizations are a little confusing, at least to me. There's green and there's blue and there's gray and there's even turquoise. And I think that is less important to categorize it that way than a much more simple way, which is no emissions. And when we look back at that earlier chart, you see that you've got water and gas and coal. And coal in this pyrolysis, this coal pyrolysis, could be to generate hydrogen as cheap as $0.20 a kilogram, which again would be less than the $0.50 threshold you'd need to really go turn on the power. If you can sequester the CO2 that comes out of that and not spit it into the atmosphere, it then becomes very, very clean power. There's a number of articles that have been written around this.

So if you actually go in, there's a Forbes article that I actually read just last night about coal pyrolysis and things that have been done around the world. I think you're going to hear an awful lot about this. And as odd as it may seem that the dirtiest of the fossil fuels may be a real gateway to creating really, really clean hydrogen for us, I think it's got a lot of promise simply because if the governments don't intervene and make it more expensive to burn fossil fuels and the market has to go produce it, this is the place where it's going to end up going. So last thing, page 22, what did we do this quarter? We did two things.

Long Ridge, which is the photo there, this was an abandoned smelter site, aluminum smelter site that the Infrastructure Fund, another kind of a sister company, had taken over. Really an interesting asset. They're building a 485 megawatt power plant there. We are partnering with them to bring in and burn at least part of the feedstock to be hydrogen. The goal for it to all be hydrogen at the end of the day. Really, my goal on this is presuming success. In other words, presuming that we can find a clean way and a cheap way to create hydrogen. What does the field data actually support? So we know what GE tells us they think it will do, and we trust them, of course. But we want to go see and verify that ourselves.

This will be a real opportunity as this gets up and running next year to run hydrogen through it, see the field data, and see how it actually performs in practice. So that's going to be a big experiment for us and something that's going to be very productive. Then on the right-hand side of the page, this is a company that we invested in called H2Pro. It's an Israeli-based electrolyzer. It basically is a much more efficient way of electrolysis. In simple terms, it's got two different cycles that it runs through, and it uses the heat that is created from the first cycle to make the second cycle more efficient. So it's kind of a combined cycle, as I like to think of it in lay terms, of electrolyzer.

The bottom line is that it uses 30% less of electricity, less than 50% of the CapEx of traditional electrolysis, and it achieves efficiencies close to 100%. So on paper, in the laboratory, this actually looks like a very promising technology. We made a small investment in it. We're going to partner with these guys to basically build a prototype so we can get actually the field data for it. But again, this is something we think is an exciting next step for us. Just flipping to the next section on COVID, I'm going to turn it over to Chris to talk about this in a second. But we posted this on our web page. This is page 24. Posted this on our web page. And I just want to give a little bit of an update in terms of what we have done as a company.

Because essentially, at least from my perspective, I've been sheltering from work since the 11th of March. So we've been here every day, and our company has been coming to work since the 1st of June. Once COVID happened, again, my point of departure was when Adam Silver suspended the NBA season on March 11th. A few folks came on the 12th. There was a handful that were on the 13th, and it was a new world. At the end of the day, in our office here in New York, on the following Monday, there were 12 people and my dog. So we were socially distanced because it's a large office and there's very few people here. As the months passed, we had more and more people that wanted to come to work.

And so basically, we set out to create an environment for them that, number one, was the safest possible environment that they could be in and they could feel comfortable coming to work. And number two, allow us to put in place the testing, biometrics, and other protocols to ensure that we're giving our employees the best chance of being here and safe. And then also, we did a number of things with our folks in the field. Because as I said at the beginning, we're an essential enterprise. Our customers rely on us for the power and the gas to run their businesses.

And so of all the things that we did here, and I'll have Chris talk about them, the one that I'm most proud of is that in the months of May and June, which were kind of the peak months in terms of uncertainty of not knowing what's going to go on, what's going to happen with this, we reached out to all of our field personnel. We paid them basically a bonus of 150% of their salary for those two months just as an acknowledgment that what they were doing was important to us, important to their customers, and we wanted to do the right thing. So all these actions at the end of the day total up to about $1 million in cost. So it's not free to do this, but the results have been really terrific so far. Chris? Yeah, thanks, Wes. Good morning, everybody.

I appreciate the time to update you on the results for Q3. But first, to talk about COVID. As Wes said, we made a carefully considered decision to return to work, and I'm happy to share a few details. As an essential industry, our responsibility to keep the lights on for our customers drove us to find a comprehensive safety plan to return to the office. And as Wes said, we are so proud of our team for their response to support our customers in the wake of the pandemic. As Wes said, the company provided bonuses for the essential workers staying on site at our power plants and our gasification terminals. Additionally, we created our own version of the NBA bubble at the corporate offices. We instituted daily questionnaires and no-touch thermal temperature checks.

We increased the frequency of cleaning the office, including COVID deep cleans on a biweekly schedule, and we've taken on a new floor to double our office space and maintain social distancing. Most importantly, we've required mandatory weekly testing for the whole company. And we've administered over 3,200 tests in the last six months. This has resulted in a safe and productive work environment with, knock on wood, no in-office transmission. Excited to announce we've hired over 60 people. We've completed eight construction projects, signed eight new contracts or MOUs representing over 2.5 million gallons per day, all while selling record volumes for the quarter. Our successes during the pandemic are owed to great customers, dependable vendors, and dedicated employees who have been extraordinarily committed during these challenging times. If you turn to slide number 26, I'll quickly walk you through the summary financial information for the quarter.

The biggest driver of our results, as you know, and as you've already heard, are volumes. We average over 1.5 million gallons per day for the quarter. As Wes said, we sold an average of 1.8 million gallons for the month of September. The increase in volumes is almost entirely driven by increases in Puerto Rico and gas sales to the Jamaica refinery boilers. Revenue for the quarter increased $42 million, which was a 45% increase over Q2. Despite the large increase in volumes, the cost of sales was mostly unchanged due to the decrease in the cost of LNG to a little more than $4 for the quarter. We are pleased to report that our non-development cash SG&A expense for the quarter was $19 million, which is just underneath the $20 million we were forecasting and on track for $80 million for the year.

One thing to call out is we had a $24 million loss resulting from the write-off of debt issuance costs associated with the early termination of the credit facility. And lastly, while I'll touch on the balance sheet in greater detail shortly, we have over $150 million in cash on hand, which when combined from cash from operations will fully fund the remaining costs to build out Mexico and Nicaragua. If you flip to slide 27, you can see the volume ramp and cash flow estimates for the remainder of 2020 and 2021. This familiar graph shows the committed volumes only, excuse me, shows committed volumes only. And given the growth opportunities, both organic through new customers, through existing infrastructure and inorganic through new terminals, there's significant upside.

In Q3, we averaged 1.5 million gallons per day for the quarter and are expecting around 1.8 for Q4 on our way to 3.5 once Mexico and Nicaragua terminals commence. When you look at the consumption for the quarter and break down large-scale terminals versus the direct sales to customers, volumes were right where we forecasted to our base load consumers. Finally, moving on to page 28, on our Q2 earnings call, we laid out a roadmap for our capital plan we've executed on those key priorities. In August, we priced an upsized $1 billion of secured notes offering due 2025 at 6.75% and refinanced our existing corporate facility and the Jamaican subsidiary bonds. This transaction pushed out our debt maturity two and a half years and will lead to $23 million of interest reduction for 2021.

The notes have traded exceptionally well post the offering, currently at 106 to yield about 5%. The bond offering deepens NFE's capital market access to fund growth and is a critical step in NFE's transition into a well-capitalized and mature company. Following our refinancing, we instituted a quarterly $0.10 per share dividend, which represents 20%-25% of the next 12 months of free cash flow. The robust cash flow generation of our business allows us to return capital to our shareholders, and we intend to stick to the 20%-25% of free cash flow target range on an ongoing basis. Three, we remain fully funded on our committed projects and are committed to maintaining modest leverage and strong liquidity. Our goal is to become an investment-grade company, and we will fund new terminals via a prudent mix of debt, equity, and cash flow generation.

With that, I turn the call back over to Wes. All right. Two questions. Great. Operator will open it up to questions.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question, please press star then one on your touchtone telephone. We'll draw your questions from the Q2 segment account team. Please stand by while we compile the Q&A. Our first question comes from Sean Morgan with Evercore ISI. Your line is now open.

Sean Morgan (Analyst)

So one thing I've been wondering about with OPEC kind of looking at easing production and Libya possibly coming back online, there's a question that maybe there may be some easing in the price of crude, and I think that kind of might have an impact on sort of the diesel competitive costs and the high fuel kind of moving lower.

Is there any risk that if that spread compresses that some of your existing customers in Puerto Rico and Jamaica, do they have the ability to switch power sources and essentially use diesel instead of natural gas that they're acquiring from you? Or are they pretty much fixed into what power source they're kind of generating from?

Wesley Edens (CEO)

Well, generally, the answer is that they are committed. I mean, we have a range of contracts. They range from merchant contracts to long-term committed contracts. The bulk of our contracts are long-term take or pay. The average term of our contracts is roughly 12 years. So for the most part, they are. But there are some that have the optionality to switch back and forth. One thing I'll say is we had done this study for one of our investors this summer.

We looked back at the previous 10 years of data looking at the delivered price of diesel versus the delivered price of gas in their country. It was an island country. And over that 10 years, there were 24 days that diesel was cheaper. So out of the 3,650 days, roughly, there were 24. So less than 1% of the days was it actually cheaper. Of course, if you had long-term very, very low prices, as you had a little bit of a dip this spring, that could definitely impact that. But I think that from a cost competitive standpoint, the last 10 years are any guide. Over 99% of the time, we are cost competitive. In addition to that, as long as you are around it, there's a lot of other hidden costs of running liquid fuels on the maintenance side and the operational side in particular.

Turbines don't like running on diesel. And so the marginal costs of maintenance and marginal costs of taking care of the equipment, the O&M costs are a little bit higher. And people definitely care about the environment. I think one of the real misconceptions people have is that somehow if you're in a developing country and you're trying to get your energy situation under control, you don't care as much about the environment as people in developed countries. And from my perspective, that's just flat out not the way that it is. So I think if there's anything close to parity, you, of course, would switch. But again, historically, it's been much to the favor of gas over that period of time. Okay. And then just another sorry. Shawn, I think we lost you.

I'm curious if you have any clarity that you can disclose in terms of what you've recontracted and what your kind of gas price is starting to shape up for 2021 and how much of that is hedged and how much of that's kind of spot exposure? We haven't done anything material that's reportable on the hedging side yet. There's a lot that is in the works right now. We still have a significant open position next year. I'd say my commentary over the quarter is that the impact of all the hurricanes that hit the Gulf Coast and shutdowns there, there was a fire at one of the producers in Norway. There's just a handful of events that happened. And so you took out a fair amount of supply. And with that, prices rose a bit over the course of the quarter.

But our position is still long-term very, very much in the money. There's been very, very little impact when you look at it quarter over quarter of the value of the long-term position. And there's some short-term volatility, and you'd expect to get that. I think most people in the market would believe that there's going to be some volatility over the next couple of years as you get these short-term swings in supply and demand. But you have a significant amount of production which is expected to come on in 2024 and 2025 that will lead to a very oversupplied market. And that allows us to have a lot of flexibility in terms of the kinds of contracts that we could get. So we don't have anything specifically to disclose, but we feel really good about this right now. I mean, in Q3, we bought the gas sub $3.

Q4 will probably be, context-wise, around $4, even though the market is 5+ dollars today. So we're in a good position here for the fourth quarter and feel very good about the aggregate position going forward. But as I mentioned before, this is something that is a focus point for me personally and for the firm. And I think we'll have some good developments to talk about here in the not-so-distant future, so.

Sean Morgan (Analyst)

Okay. Thanks, Wes.

Yeah.

Operator (participant)

Thank you. And our next question comes from Devin McDermott with Morgan Stanley. Your line is now open.

Devin McDermott (Analyst)

Good morning. Thanks for taking the question. So the first one I wanted to ask on is hydrogen and appreciate the additional time and detail you provided on this call and also congrats on the significant steps you've taken just over the past few months in advancing the zero ambition that you all have.

I wanted to talk about the specific next steps here as we think about really the next few years and executing on this strategy. And I think you all have talked about doing some pilot projects with the H2Pro investment. I was wondering if you could comment on kind of what you're seeing there in terms of what those projects might look like, any comments on customer demand for green hydrogen as well. And then should we think about additional tech investments to come? For example, you talked about the gas and coal pyrolysis. Is that something where you could make some seed investments as well? Really just kind of framing up the next few years in terms of the opportunity set and capital allocation around this opportunity.

Wesley Edens (CEO)

Yeah. Well, the two answers to that.

One is with respect to the prototypes. Really we're trying to identify technologies we think have promise, make an investment in the company, then become a partner to build a prototype to get field data to support what the theoretical data is in the lab. So that's the general thesis that we have. H2Pro, we think, is a very capable group. We like their technology. So we want to see that out in the field, build a prototype with them, and get that deployed. And so that's the one specific thing. When I laid out the numbers on water, gas, and coal, I did so because my view about this, my intention of this is to try to find a technology, try and find a process, try and find a way to really deal with the climate change issues in a very, very broad way.

And you need to have scale to do so. And the one page I laid out during our show, kind of theoretical best price of $0.80 and $0.60 and $0.20, those are really theoretical best prices today. And of course, things could change. But that's if everything works out perfectly. And I'd lay that out because simply, if you then add on a capital cost and you ended up at $1, for example, on electrolysis, that's still roughly twice as expensive as what people can burn natural gas in their power plants here in the U.S. today. So that is not going to actually solve the problem unless either the government makes it more expensive for people to burn fossil fuels or they give you some production credit.

So then when you go to the right-hand side of the page and you look at the other things that are possible, the coal really does leap off the page. And it's a very counterintuitive thing. And so for the ESG folks that are trying to invest sustainably, they hear coal, I'm sure it makes their eyes roll a little bit. But that's why I say it's not about, in my view, it's not about the characterization of kind of green or blue or turquoise or gray. It's really, can you produce hydrogen and do so in a way that creates zero net emissions? If you can, that's very clean. And what we have seen has been some pretty promising technologies that would indicate that it is possible to basically create hydrogen very, very inexpensively this way. And then the stream of CO2 is very pure.

And CO2 itself, then it becomes a question of what can you do with the CO2? It's got an industrial use. It can also be used for power generation. It can be used to sequester it underground. There's a whole bunch of different sequestration technologies. And so to me, the key to this thing is if you can figure out a way to sequester it economically, that unlocks a huge new store of value. I mean, I joke about with my guys here. My great state of Montana has massive coal reserves. You can end up with Montana and Wyoming being many Saudi Arabias of hydrogen production. And I know that sounds fanciful, but go onto the internet and start looking at these different articles and things that are out there, and you'll see this is a very serious enterprise that people are looking hard at.

It may not be ultimately the best long-term solution, but it may be a great intermediate solution. So I believe there will be trillions of dollars made, literally, in this transfer from a fossil-based system to a hydrogen system. And I think that the people that can identify the right technologies and the right feedstock and then industrialize that are going to do very well. And it's the doing well by doing good, and it's something that I'm very, very focused on. We're very focused on. We have a great team of people that are working on this stuff. And so I think we will make a follow-on investment, my guess, in some of these other sectors much sooner than later. And I'm very impatient about it. But I think that you have to get the cost of it down kind of $0.50 or less.

At $0.50 or less, everything changes, right? At $0.50 or less, and you can do it with clean, emission-free production, you will see a massive transition over, and so it's very clear to me now what the path is, and I think the electrolysis has got a lot of promise, in particular in transportation, where you could imagine distributing electrolyzers all over the place. Maybe you're making your own fuel effectively where you're using it, and that's how you cut down on a lot of your logistics and transportation costs and whatnot. There's a number of different paths, but the big one that would be a game changer is figure out a way to really create long-term emission-free hydrogen at $0.50 or less. That then puts you right into the strike zone of all these different technologies. I said the three. It is transportation.

It is power, and it's industrial use. Solve that, and you've done a really good job of kind of cleaning things up. So sorry for the long answer to a short question.

Devin McDermott (Analyst)

No, that's great and really helpful context. And my second question, I want to switch here a bit to the growth opportunities you have within the existing portfolio. And I think the additional detail and disclosure on the small-scale opportunity and the execution you've had there is really good to see. You highlighted the $1.2 billion of P&L opportunity from increasing utilization on existing terminals. And I guess the question I have is, one, any logistics constraints that would prevent you from going to theoretical 100% utilization, as you highlighted in that slide, that we should be thinking about?

And then secondly, I think on the slide, it talks about 50,000 gallons per day from the nine customers you've executed on so far. And in the remarks, you also talked about 190,000 of a small scale within the portfolio. So just kind of bridging those two numbers and then thinking about what's likely to come here over the next 12-18 months.

Wesley Edens (CEO)

Yeah. I mean, to answer the first question, there's no constraints at all. In fact, as I've often said, in the infrastructure business, it's actually very simple. If you create infrastructure for one purpose and you don't use it, you lose all your money. If you create it for one purpose and you use it, you get a decent return. If you create it for one purpose and you use it for two or three or four, that's how you make outsized returns in the business.

This is just simply an attempt to do the latter, which is basically take the infrastructure, the logistics, the people, personnel that we have in place, and go aggressively into those markets because we have a massive competitive advantage. Our renewed focus on that, as Sam touched on a little bit, we've got milestones. We've got our first couple of customers turned on in Puerto Rico. We've got our first contract signed in Mexico. We think that there are many, many of those to follow, and that is really low-hanging fruit. It's got a real focus for us in those markets. We think there's significant incremental demand. As you can tell from that table, we've got significant operational flexibility to service them. That's a really big focus for us.

The beauty of it is, obviously, because there's no lag time in the logistics and the infrastructure, those are the kinds of things that could translate into earnings and sales for us in the very near term. And that's really a focus.

Operator (participant)

Thank you. Our next question comes from Joseph Osha with JMP Securities. Your line is now open.

Joseph Osha (Analyst)

I wanted to return a little bit to this issue of hydrogen and the transportation market because, yeah, the price points there that that market will bear are potentially higher, particularly if you look at running hydrogen and fuel cells. I'm wondering if you look at what might be economically viable there doing electrolysis on-site, as you talked about, Wes, and whether that might work at, say, $1.50 a kilogram or something.

Wesley Edens (CEO)

Yeah.

No, it's really interesting because the process that we've been going through with this is basically twofold. One is, how do you create hydrogen at the lowest possible price, which is a big focus? And then two is, if you had inexpensive hydrogen, what would you do with it? And it's very, very similar to what we'd looked at when we built this business as our core business because we knew that once we solved for the logistics and the infrastructure to bring LNG, the question is like, what were the customers that would be most obviously you would go to? Our answer for that, obviously, was to go to power because power generation is in a single place, so it's kind of simpler logistics. And the needs that they have are daily, and they're significant. So that became the answer. We also have some transportation customers, right?

So at one point, we owned in a different company here, we owned the biggest LNG trucking fleet in America. We have supplied the bus system in Jamaica with natural gas. So there's a number of—and if you look at the development of natural gas as a transportation fuel, what you see is that it developed around places where logistics became actually fairly straightforward. So the kind of return-to-base users. So garbage trucks, municipal bus systems, UPS trucks, FedEx trucks, they all come back to the same thing to refuel because that's why when I show the fuel price there, you're 100% right. You look at it and say, "Gosh, $15 an MMBtu. We can make it a lot cheaper than that. That's great." There's an asterisk next to it because you have to get it there.

And so hydrogen trucks or hydrogen cars, all those kinds of things are big theoretical customers, but there's a significant infrastructure build-up that has to go along with it. I think one of the geniuses, effectively, of electric vehicles is that you don't need to have all that infrastructure in the same way because everyone's got an outlet in their garage that they can plug their car into. And so, in effect, a lot of the infrastructure already exists because you have electricity in your house. But you can see that even with electric vehicles, there's been a pretty slow build-up for the infrastructure that supports these charging stations around. And there's a lot of analogs you can draw between the two of those. Now, one thing I'd say about this, and I think it's a miracle that more people don't talk about it.

People talk about electric cars, and it's really clean and emission-free, and that's great. But where does the electricity come from is a fair question. And so if you're in a state where 50% of your energy comes from coal, you're basically running your car on coal. And that may not be a very popular thing for the electric vehicle guys to think about, but it's the truth. And so really, I think that the transportation stuff, my view, again, if you look at the places that have got the simplest logistics long-term to sort out, they'd be ships because they come to the same places and they use a lot of fuel. Airplanes because they come to the same places. I think actually one of the big opportunities, honestly, will be railroads. We worked with the Siemens guys.

They think that they're going to have a very, very effective form of a prototype for a hydrogen-powered locomotive, like a booster on this thing. Again, logistics for railroads are a lot easier because they're on the tracks, so we know where they go. So it's a much easier thing to solve for. So I'd say in terms of degree of difficulty, cars, trucks, long-haul trucking, that's the most complicated because of all the infrastructure build-up. But things like municipal buses, things like garbage trucks, things, the return-to-base users, as well as things like railroads are probably on that list. And you'll probably see a fair amount of development around that. And I think that electrolysis, even if it's not as cheap as maybe some of these other things we're talking about, it is cheap enough to be really effective on that.

And if you distribute those electrolyzers around, then you don't have to build the infrastructure to then transport the stuff, which is another incremental cost that you kind of skip, so.

Joseph Osha (Analyst)

Yeah, for sure. Can I ask a follow-up? Actually, sorry, a follow-up is a completely different question. I'm wondering if you're starting to see from some of your new markets any demand related to using gas as a firming resource alongside renewables.

Wesley Edens (CEO)

Well, I think that the energy plans that I see over and over in these countries are some combination of gas-fired power and renewables. I mean, renewables are awesome, right? They're clean. They've gotten much, much cheaper, much more cost-competitive. The negative, obviously, is they're not dispatchable. So here in New York City, I'm looking out the window today, and it's pretty rainy and misty. Solar resources wouldn't be working very well right now.

So you need something else to kind of go alongside of it. And this is what really kind of got me very focused on the whole hydrogen thing is that if you have hydrogen, that is effectively the battery that you need to support you on days like today. And allow for a much, much higher percentage of renewables in your system because you know then you've got a very active battery to do it. And your choice is hydrogen as a battery or batteries as batteries. And right now, the differences are not even close. And also, you also have to think about it. I'm trying to be very, very intellectually honest about looking at the process of creating the hydrogen and looking at how we create it, how clean it is, etc. We should apply that same rigor to creating batteries, right?

If you're going to actually make a battery, there's a whole bunch of stuff that goes into it. We should just think about that production process and line it up side by side and see which one is really cleaner as well as cheaper. I think our analysis, our conclusion, obviously, is that hydrogen, actually, if you can do it properly, is very, very competitive and very, very clean. There's no doubt that gas, I think, is going to play a big role. We see not only gas in terms of the new power plants, but then, again, replacing existing thermal power. My first big discussion two nights ago with one of the Asian customers that is deadly serious about converting out of a big coal-fired operation into natural gas. At these prices, it's pretty competitive.

But environmentally, on top of that, it's a big, big plus. So there's no doubt that gas is a big part of the energy infrastructure of the developing world, so.

Joseph Osha (Analyst)

Thank you.

Operator (participant)

Thank you. Our next question comes from Christine Cho with Barclays. Your line is now open.

Christine Cho (Analyst)

Wes, you guys have worked hard to get to a position of being free cash flow positive in your base business. And that's maybe distinguished yourself a bit from some other clean tech-type companies, clean energy. So this might be a bit of a longer-dated question. But just curious how you think about maintaining a positive free cash flow position given the magnitude of opportunities that you've alluded to. And maybe as a follow-on, a couple of quarters ago, you referenced a potential equity issuance.

And it sounds like most of these investments are modest in size, so probably not applicable in near term. But depending on the scale of investment, could you guys come to market in conjunction with one of these investments? And that's how you kind of increase the float of this stock.

Wesley Edens (CEO)

Yeah. That's a really, really good question, Christine. I think that, look, we're very, very focused on free cash flow. And while it's great to talk about all the upside and the potential and the hydrogen stuff, and that's obviously a real passion around here, the business is made every day with free cash flow that's generated from our operations. And they are significant. They're consistent, as you can see from our presentation of them. And most importantly, they're growing.

I really believe that when the two terminals are completed and we bring another couple of projects to FID by the second half of next year, we could double our free cash flow estimates where we are right now. That's the dimensions of the transactions. When I say that I'm very focused on a handful of countries, it's countries that we think not necessarily are going to have 1,000 megawatts or 2,000 or 3,000-megawatt projects, but ones where we can do incrementally the same kind of things we've done before, three, four, 500 megawatts in projects, and then do that over and over because the economies are big and growing. I'm deadly serious about being a company that generates billions of dollars in free cash flow in a very consistent and straightforward manner and doing so faster than not.

That's why the whole focus on the logistics chain, the ISOFLEX, the ability to get into these markets quickly is something that we are laser-focused on, that plus the organic growth, so the cash flow generation is something that we're very focused on, and you're right. Most of the investments we have looked at in terms of incremental things have been modest in size, but the capital required for a situation like Nicaragua is roughly $250-$300 million for a 300 MW plant plus all the related infrastructure. That's a good placeholder for the size of investments, which I think you will see, and so, obviously, if we do two or three or four or five of those, you can do the arithmetic and look at what our capital needs would be.

We have not issued any equity since the IPO, and we haven't had the need to do so. Chris has been very clear, and we have a clear policy in terms of growing the company, but doing so with really debt and equity hand in hand because we want to maintain the credit profile that we have and improve on it as we get more diversification and we get more cash flow. But I think that more capital events are to come, assuming that we are successful in our pursuit of new business. And relentless is the word I would use. I mean, I'm so focused on the next customers. And there's so much to do in these different markets. And we just have to put the people on the field that have the capability of doing so. And we have done that.

Like I said, a dozen new people on this side. At the end of the year, our forecast is we'll have roughly 50 people in the origination business around the world in these different markets, and so you add that all up, that's the infrastructure that can generate the flow of new opportunities, and then we've got the development teams and the operations team to then execute on that. That's what the core business profile is, so there's a lot more to come, but I feel even in a time of COVID where it's a challenge, frankly, to get in front of people and you're meeting people on Zoom calls rather than in person, that this too shall pass, and we've made a lot of progress over then.

Knock wood, I think, will have some exciting things to announce hopefully soon because I feel good about a number of the things that are out there. But I can't forecast that until they actually get done. But our goal, as I said, two new material projects done by the end of the year and 5-10 next year. Those are lofty ambitions. But I think that the foundation for them is actually set with the infrastructure we're putting in place, so. That was really helpful. Thanks. And then just separately, is there any update you can provide us with the FERC proceedings around the Puerto Rico terminal? There's no update. We sent a response letter. It's all public. Everything is out there. So you can see their letter. You can see back our response. We feel 100% good about our position. But we haven't heard back from them.

So we asked for them to respond expeditiously. They didn't, so. I don't control that. But no, we feel very good about our position, so.

Christine Cho (Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next question for today and our last question for today comes from Ryan Levine with CCiti. Your line is now open.

Ryan Levine (Analyst)

Thank you. What do you anticipate is the most efficient way to transport hydrogen to some of New Fortress's current end markets? And would you have any intention in pursuing the infrastructure to help facilitate that? It is a great question, Ryan. Hydrogen can be frozen. It's a smaller, lighter atom, so it takes a little bit more energy. I think it freezes about 100 degrees colder than does LNG. So that part of the infrastructure works. There seems to be some challenges in putting it into pipelines, right? So we've talked to the technical people.

I guess the atom is so small that there's some permeability issues and whatnot. So it's a real issue. One of the things I think is really interesting about the production of it, though, potentially, is electrolysis, if that was your feedstock for hydrogen, you could perform that on-site, potentially, so actually obviate the need for transportation. That's one significant benefit of it and something to really think about. Also, again, depending on the feedstock, that's why I lay out that feedstock page. You could use the feedstock, transport that, and then have your hydrogen production on-site. So I think what's likely is you'll see distributed production is kind of the way we think about it. So hydrogen in a box, effectively, where you've got different production technologies that then travel to where they're used.

That's why I'm so focused on price because when you look at the big users for it, the ones that leap off the page, the industrial users and the power plants, and you could potentially actually create your own hydrogen on those sites. That's, in effect, what's being done today. It's being done in a super-duper dirty way. And I think it's amazing. I put those numbers there. Maybe they didn't surprise you. They surprised me. I was shocked to see that actually hydrogen is a bigger market than is LNG today. The users for it are basically the refineries, right? The refineries use a lot of it for industrial purposes. And then, of course, it's used a lot in the production of fertilizers, so for things like methanol and for urea and ammonia in particular.

One of the other things people have talked about is it's fairly easy to turn hydrogen into ammonia and then ship ammonia. That's done commonly. It's actually shipped all over the place. And then you can either use it as ammonia when it gets there in some way, shape, or form, or you have to put a fairly simple cracker in place and actually split it back out. But your question is spot on, a great question. It'll be first, find a cheap way to make it. Second, find a use for it. And third, try and figure out how you're going to get it from point A to point B. That is the logic chain to get from one place to the other. And we're still on one. We're making progress on one. Once we get to one, two is in the gun sights.

Three will be a big part of the solution for it, though. Thank you for some good options.

Operator (participant)

Thank you. I'm showing no further questions in the queue at this time. I'd like to turn the call back to the speakers for any closing remarks.

Wesley Edens (CEO)

Great. Thanks, everyone, for calling in. Obviously, we're happy to follow up on any follow-up questions through Josh or anybody else in our Investor Relations Group. We look forward to talking to you after our next quarter in the new year. Thank you.

Operator (participant)

You've been thanked for your participation on today's conference. This does conclude your program. You may now disconnect.