New Fortress Energy Inc (NFE) 2019 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the NFE fourth quarter and full year earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. [Operator Instructions)

I would now like to hand the conference over to your speaker today, Alan Andreini. Please go ahead, sir.

Thank you, operator. I would love to welcome you all to the New Fortress Energy LLC Fourth Quarter and Year-end 2019 Earnings Call. Joining me here today are Wes Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer; and Brannen McElmurray, our Chief Development Officer. Throughout the call, we are going to reference the earnings supplement that has been posted to the New Fortress Energy website.

In addition, we will be discussing some non-GAAP financial measures during the call today. The reconciliation of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Now 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 to review the risk factors contained in our quarterly report filed with the SEC.

Now I would like to turn the call over to Wes.

Great. Thanks, Alan, and thanks, everyone, for calling in early this morning. We posted a presentation on the web page a few minutes ago, and that's what we're going to refer to as we go through so if you want to pull that up and follow along, that would be great.

I'll start with Page 4, Q4 2019 highlights. Good news is there's a lot of highlights. Pretty much in every respect, it was the best quarter that we've had since we've been a public company. We recorded positive operating margin in our assets for the first time. Chris will walk through that in some detail. But as I said last quarter, the transformation from a development company building stuff to an operating company running stuff and generating revenues is very much underway.

Our positive operating margin in the fourth quarter, substantially more in the first quarter. Second quarter will be relatively full run on the assets that are under operation, and we are well on the path to be a very, very cash flow generative company, so that's great.

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And then as we announced about 10 days ago, we signed an agreement to build a new terminal and associated power plant in Puerto Sandino, Nicaragua. So our fleet of terminals basically expands from 3 to 5 with a very substantial pipeline behind that, and I'll talk about that in a second.

Number four, LNG supply has been a big news item for us. The path of the company is we've been very focused on securing downstream distribution for our assets. That's been our focus. And as we get those assets online, then look to lock in long-term supply. With all the good news we've had in the development side, it was the right time to step in and do that. LNG prices have fallen precipitously in the last 12 months, down 70% on a spot basis, long-term basis down as well. Chris will talk about that in some detail, but we did step in and buy about $1 billion worth of supply here at the end of January. More to come there. We're still net-net, very undersupplied, which is good news in this market that gives us a tremendous amount of upside.

Lastly, the plumbing, the -- on the financing side, we refinanced our debt. We basically increased the debt facility from $500 million to $800 million, extended it 3 years, did it basically under the same financial terms, very much now on the path to the capital structure that I think is the appropriate one for the company. It will eventually be some combination of corporate debt and secured debt. This is a very, very good step in the right direction for us, gives us all the capital that we need on balance sheet without having to access equity to build out all the stuff that we committed to.

So just really briefly, let's just revisit what the business is, so flip to Page 5. The business is a terminals business. We develop and operate a global portfolio on this terminal infrastructure. It is really the cornerstone of our business. We focus on those areas of the world that have 2 characteristics: one, they have large populations and growing economies; number two, they have inefficient and outdated infrastructure. Those are very simple criteria. They apply to a big chunk of the world.

Really, our business, for the most part, is outside the developed markets. As you can see from the concentric circles that we've got there, we obviously started in the Caribbean, that's been a big focus for us, recently moved into Mexico and Central America, South America, Africa, Asia. These are all markets where we're very actively having discussions right now. And I think it's not long from the day when the sun won't set on our fleet of terminals around the world. So it's a big, big focus for us. We know that once we get the terminals in place, these are the portals that allow us to bring LNG and most importantly, power to these countries around the world and that's the focus of the business.

Page #6, we show you more specifically what the geography looks like. So you can see the Caribbean, we've got the 2 terminals in Jamaica, the 1 terminal in San Juan, Puerto Rico, the 2 under development then in La Paz, Mexico, Puerto Sandino. It's a great constellation of assets thus far and we're far from really being done. The numbers that I'd point you to on the right-hand side of the page that are relevant is that with the 3 terminals in our operation, our committed volumes right now, a little over 2 million gallons per day, capacity 9.4 million, so about 21% of it is actually used. So we generate high margins, we generate a lot of cash flow and we still have a tremendous amount of growth organically in those assets.

Below it, you look at the committed portfolio, and overall, the numbers basically stay the same, so we're roughly 20% utilized out of the 16.54 million in capacity and then our committed volumes have gone up substantially. The pipeline is extremely robust. And so without using superlatives and a lot of glory words about it, I can just tell you that the business has never been more robust for us. As we have developed these existing assets, have shown proof-of-concept, have shown that we can actually deliver what we want, have shown literally rings off the hook with people that are interested in having us come and talk to them about solutions for their countries.

Page #7, let's just walk through the math. It's actually very, very simple. Our goal, and I'll talk about this more specifically in just a minute, but our goal is to develop a portfolio with 20-plus terminals around the world. If you look at the box in the lower left-hand side, you can see that we've got 2 circles there. So at 1 million gallons per day, it generates about 25% operating margin. At 3 million gallons a day, those margins increase. It's kind of the Bernoulli's principle of terminals, so the bigger, it gets faster, if that makes sense to you. But when we look at these terminals, we believe that each one of these markets can support something between 1 million and 3 million gallons per day. Those are broad numbers but it's a good illustration of what we think it actually can do.

That then translates, in the right-hand side, to a very, very substantial amounts of cash flow. So a portfolio of 20 terminals generating 1 million to 3 million gallons a day would generate between $2 billion and $8.5 billion in EBITDA, so very, very substantial amounts of EBITDA. What I would point out is that while these look like very big numbers, and they are, we are 5/20th of the way there, so we're about 1/4 of the way there. We've got a pipeline of about 8 different terminals are in discussion right now with a long, long list of other markets that we think are applicable. So this is our -- this is the goals that we focus on from an economic standpoint in the short term, but we're well down the path of achieving this.

So Page 8, the update, and again, I'm going to turn this over to Brannen just 1 second to talk about the developments. But basically, these 4 customers represent 90% of our average committed volume for 2020. The Bogue power plant, which is the first plant that we converted; the Old Harbour power plant, which was recently converted; the Jamalco power plant that we went COD on just 2 days ago; and the San Juan power plant, which is being converted right now and the terminal is completed. So lots of lots of good progress on the development side.

What this means to us in math is very simple if you look at the bottom of the page. The goal is to generate $250 million of committed operating margin in Q2 2020, growing to $450 million based on existing committed volumes when Puerto Sandino and La Paz get up and running. So $250 million going to $450 million over the next year or so. And I'll give you my two cents on how I think about valuation of this. So $450 million less $80 million in SG&A, which is about what the number is, $370 million, 15x multiple, which I think is the right multiple to start with on an EBITDA multiple, that's $5.5 billion enterprise value. Taking $1 billion in net debt, $4.5 billion in valuation, divide that by our 168 million shares, that's $27 a share.

So with no growth whatsoever other than just executing our existing business right now, it's a doubling of our stock price and I think it's just the beginning. So that's something that we'll talk with analysts about and talk with investors about individually, but I think that as we now transform into the positive cash flow and these terminals get on, I think that our upside and valuation standpoint is significant.

Lastly, before I turn it over to the other guys, let's just talk about our goals. These are our goals of the company. And there's 2 very simple things that are both manifested in our business day-to-day. One is what I've mentioned before is become the world's largest IPP. So the world's largest producer of power outside of the developed countries. 20 terminals with 1 million to 3 million gallons apiece, so 1 million gallons a day is about 400 megawatts of power. Turn that into power for the overall portfolio, that's 8 to 24 gigawatts, $2 billion to $9 billion in operating margin. Big numbers, easy to follow, pretty simple unit economics and something we should be able to update you on, on a quarterly basis in a very, very simple thing.

Second, and this is a big passion for me, is a new goal for ourselves, which is I want to be 0 emissions as an operating company in 10 years. Today, we deliver low-carbon natural gas-fired power, substantially better than oil-based power, obviously much, much better than coal-based power, a huge step in the right direction but still based on the fossil fuel. Tomorrow, we aim to be the world's largest IPP and entirely emission-free. We'll talk about this at the end of our new initiative -- it is called Zero and I'll give you our thoughts about how and why we intend to get there. It's an audacious goal but one that I think is very, very achievable, and I look forward to chatting about that in a second. But first, I'm going to turn it over to Brannen.

Thanks, Wes. Good morning, and thank you all for joining us. I'm very excited to be able to update you on what we've been doing over the past quarter. I'll refer you to Page 11. We've had a very productive quarter, as Wes has mentioned earlier. Importantly, 4 assets for us account for 95% of our 2020 volume and all of those assets are in operation, so I'll kind of emphasize that all those assets are in operation, and that's a really significant milestone for us for really a number of reasons: number one, because we've shown that we can deliver on our commitments; number two, it's proof-of-concept for all of the things that we're working on currently in the development pipeline; and then most importantly, it kind of gives us a game plan that we can replicate in other markets to be able to deliver our product really faster, cheaper and better. So it's really been an exciting 90 to 120 days for us.

To run through those briefly: first, we have the Montego Bay terminal, and so as you recall, the Montego Bay terminal initially was supporting 120-megawatt combined cycle. That's now been expanded to 150 megawatts. So that facility now supplies over 400,000 gallons per day to industrial customers in our distribution business as well as power plants. The second asset that we'll be referring to is the Old Harbour terminal, which supports 190 megawatts of the combined cycle owned by Marubeni and its partners. As Wes mentioned, that facility is running full out on natural gas. We underwrote it originally at 360,000 gallons a day. What we're seeing, from an actual performance basis, is something closer to 400,000 gallons per day, again outperforming our expectations on and the facility's working beautifully.

On the third asset, the Jamalco heat and power plant, which Wes referred to, this is the first power plant that New Fortress Energy has designed, built and now operated, and it turned on in commercial operation on Monday and now produces 150 megawatts of power and steam. Today, I think I looked at it this morning, it's producing almost 400,000 gallons -- or I'm sorry, it's producing almost 380,000 gallons a day in combination with the boilers and also the other facility that's doing. We expect that to hit a run rate at the end of this month, about 380,000 gallons per day, which again, is in line with what we had expected.

The fourth terminal, which is the San Juan facility, is very exciting for us because it's the one in Puerto Rico. It's an extremely fast track project. I think end-to-end, we probably have delivered that in 11 months, which is a record for us. It supports 440 megawatts of combined cycle of existing power generation in Puerto Rico, as Wes mentioned. On Monday, we brought the Coral Energy in, which is an FSU, to berth at the dock on the 24th, on Monday. It worked beautifully, no drama, lots of great pictures, which we -- I think we've posted on our website that you can see and a lot of really good media around that. Most importantly, I think for that facility, it's in commissioning now.

The second part about it is, for the power plant itself, there are 2 turbines. One has been converted so it was able to run on natural gas now. The second turbine is in the process of being converted, and that process will be completed by the end of this month. And so our expectation is by the end of March, that that facility is up and running right around 882,000 gallons per day. So again, those 4 facilities together are the lion's share of what our committed volumes are, and all of them are in operation and should be at run rate by the end of the month.

So I'll flip to Page 12. So using that as a jumping off point, our next 2 facilities that are in progress are essentially replicas of what we have already done. So the La Paz terminal is very similar to what we've done in San Juan. As a matter of fact, about 90% of it is exactly the same. In terms of status, it's in construction now. Our expectation is that we'll deliver first gas by the end of this year and the volumes that we're expecting to achieve are right around 450,000 gallons per day.

As Wes also mentioned, we're very excited to talk about a new opportunity in Nicaragua, where we have signed a long-term PPA, where we've committed to. It's in the preconstruction phase now, so we're now gathering the resources to deliver on that project, where the expectation is that we would deliver it in Q2 2021 and our expectation there is 745,000 gallons per day.

I think importantly -- I'm going to flip to Page 13 and then talk about something that we're seeing in our markets, which I think you would be very interested in. As Wes has said a number of times, probably the biggest trend that we're observing is the world is just under-electrified. As you know, the average Jamaican per capita uses about 1/10 the electricity of the average U.S. person per capita. And then the average Kenyan per capita uses about 1/10 of what the average Jamaican uses per capita on power. So clearly, from a worldwide perspective, access to affordable reliable power. Power is just a cornerstone of economic development. In every place we go, we're asked to solve this problem.

The exciting part about it is, based on what we have done previously and the experience that we're getting and what we observed to be the opportunity, the request that's coming in is for fast track power. And what all nations, governments, private sector are focused on is the ability to have an integrated fuel infrastructure and power solution in 12 to 18 months because that's the problem that they want to solve. And so from an opportunity perspective, what we think is in any location where you have about 200, 300 megawatts of power that can catalyze a terminal, which is going to be fuel infrastructure and then the power generation to support it. In our particular markets, and given our experience and our track record, our competitive advantage is the terminal itself. With the terminal, you control the infrastructure and the fuel, which gives you a tremendous advantage to provide fast track power. So our goal in each of the markets that we operate in with the terminal s to see opportunities we can provide additional power generation in 12 to 18 months.

These opportunities, we would expect to see in places like Mexico, Puerto Rico and a number of other jurisdictions in which we operate, and it gives us a key advantage to deliver that infrastructure quickly and at a power price that's going to be more competitive than we believe anyone else would be able to offer. As Wes said, in combination, our goal is to be able to build, own and operate 20 terminals, to be able to deliver somewhere between 8 gigawatts and 24 gigawatts of installed power, which would make us one of the largest IPPs on planet Earth. And as he also said, we're about 1/4 of the way there so we feel very good about our chances of getting to that goal.

I now flip to Page 14 and I want to give you a couple of highlights around the operations for the quarter. I think most importantly, about this page, from the operational perspective is no news is good news. And what I mean by that is our track record of 0 safety incidents has maintained, I think, quarter-after-quarter and that's really important to us. So the most important number on the page from our perspective is 0. Every day, you have to be extremely focused and religious about making this 0. And so from our perspective, the health, safety and welfare of our people as well as the stakeholders and the environments which we operate is paramount for us.

Also a couple of the numbers to highlight on the page. Our assets are essentially extremely reliable and available, but most importantly, I think the takeaway from it is, we are more reliable and available than the customers that we support. And the good news about that is, from a customer perspective, we are viewed as critical infrastructure. And so day after day, we continue to be available for them as they deliver to the customers that are critical on their side.

The other thing I would highlight on this page is our number in terms of LNG truck and ship transfers goes up quarter-over-quarter without incident, which we're extremely proud of. So today, we have about 5,500 transfers without incident, which puts us #1 on the list in terms of experience in the Western Hemisphere and arguably, probably around the world. From an operational perspective, every day, we continue to try to get better. So we're introducing new technology, new processes with just a relentless drive to get better, cheaper, faster, so we can be more competitive in the markets in which we operate.

Now I'll turn it to Chris so he can talk about the financials.

Great. Thanks, Brannen, and it's wonderful to talk to you all this morning. First, on Page 16, let me take a quick moment to walk you through the financial results for Q4 2019.

First and most importantly, as Wes has already highlighted, this was the best quarter in our history. Q4 was our first quarter with positive operating margin and we're well on our way to over 475 million on committed volumes alone. As you all know, and if this key driver of profitability is consumption, and for Q4 2019, we averaged 538,000 gallons per day. This is an increase of over 200,000 gallons from Q3, largely due to the Old Harbour plant coming online and ramping over the course of the quarter.

During the month of April, with Old Harbour, Jamalco and Puerto Rico ramping, we should be over 2 million gallons a day of consumption. As additional volumes are sold, there's an exponential effect on margins, which we expect to be above 30% on a normalized basis as asset utilization increases and legacy expensive gas purchases are consumed.

Regarding SG&A, we had expenses for the quarter of about $30 million, which included $5 million of stock-based compensation and about $3 million of nonrecurring development costs. We do expect that the go-forward annualized SG&A for the company will be around $80 million, excluding noncash compensation expense and noncapitalizable development expenses.

Flipping to Page 17. This outlines some of the key characteristics of our Apollo debt facility and shows the strength of our balance sheet, which fully funds all of our committed projects. In January, we closed on a 3-year $800 million term loan facility. This financing accomplished many of the key objectives we've discussed on these calls in the past. We added $300 million of new capital to prosecute additional terminals. We extended our maturity out into 2023. We retained maximum business flexibility, and we accomplished all of this while maintaining materially the same cost of borrowing.

One of the most important features, however, is that this debt can be repaid at par at any time. And as alluded to in the past, once our assets come online, we can borrow additional amounts that will fund new development projects at lower cost of capital. On the right side of the page, as you look at the balance sheet, we showed debt and cash as of the 12/31/19 measurement date, but we've also included a pro forma cash number of $404 million. This $404 million is a result of the post year-end funding of the remaining $52 million under the senior secured bonds and the additional capital provided from the Apollo facility. The driving factor in executing the refinancing transaction was to ensure that we had ample cash on the balance sheet to fully fund all of our committed projects, including Nicaragua.

If you turn to Page 18, this news will come as no surprise to any of us, but the LNG market has materially deteriorated over the last few quarters. As Wes has said in the past, LNG supply has added 1 train at a time while demand has turned on 1 turbine at a time. And if more is produced than consumed, this oversupply of LNG, coupled with the fact that the commodity can't be easily stored, will result in the collapse of price like we've experienced in the last year.

Global LNG prices have seen a reduction in the spot market of over 70%, and the term market down nearly 50% from the end of 2018. For NFE, once projects become operational and we see the consumption profile of the asset, we will contract for supply. This is exactly what we've done in Jamaica. We've recently announced publicly that we executed a long-term supply agreement for 2022 to 2030 for a portion of our volumes priced at approximately $4.50 using today's Henry Hub.

On Page 19, we show the depressed LNG -- we talked about the fact that these depressed LNG prices have created an amazing opportunity for NFE to take advantage of this market imbalance. In fact, we were able to buy our first commissioning cargo for Puerto Rico below $2.40, which will be delivered later this month. Our corporate models have assumed an LNG cost of $5.50. However, our ability to buy in supply at today's prices demonstrates the material hidden value of our position.

As you can see on the graph on Page 19, we have only purchased about 1/3 of the supply that we need over the next 5 to 15 years. If you bought LNG for the remaining life of NFE's committed volumes and you assume today's spot prices of roughly $2.50 for Caribbean deliveries, the incremental earnings would be approximately $3.5 billion compared to our projections. Operating margins over the next 5 years could be up over 35% by taking advantage of current market conditions.

Turning to Page 20. This slide should look familiar to you all as it shows the rapid ramp-up in committed volumes. We have included this slide in previous presentations, and while you should not mistake this for formal guidance, we do include it to demonstrate that these assets have material cash flow capability once operational. As Wes mentioned, our operating margin from PR and Jamaica assets alone will ramp to $275 million on an annualized basis during Q2 of this year. And when you include Mexico and Nicaragua, we expect to be over $475 million next summer. If you look at converting just 50% of the volumes that are currently in discussion, operating margin expectation exceeds $1 billion.

With that, I'll turn it back over to Wes.

Great. And just to wrap up before we open the lines for questions, look to Page #22 and let's talk about Zero. We're introducing Zero. Zero is a new division for New Fortress, "Zero carbon. Zero emissions. All good." It's an audacious goal of ours to be a 0 emissions company 10 years from now. Audacious that our planet and humanity can't afford for us not to be ambitious about this.

Our path to getting there is green hydrogen. Why green hydrogen? Hydrogen is the most abundant element in the planet. 90% of all the elements in the universe has hydrogen so it's a very abundant element. It doesn't exist naturally by itself, but it exists in lots of forms that can be converted from their current form into hydrogen with the application of a little bit of energy. The path to getting there, and I'll talk about this in just a second, is to use renewable energy and I'll tell you why I think that that makes so much sense. The costs of production are falling rapidly and makes this a more and more achievable goal.

So look at Page #23. The schematic on the top of it is a good picture of how an electrolyzer actually works. This is a very, very simple thing. Imagine a fish tank where you had 2 electrodes that came in, one is positive, one is negative. You run electricity through it. It breaks the molecule into pieces. The bubbles on one side end up being hydrogen, the other side end up being oxygen. This is a process that's developed over 100 years ago. It's used daily in the space station. It's used daily in nuclear submarines, so it's not a space age technology at this point at all. What has changed is that the cost has changed dramatically. The reason it hasn't been used historically as a replacement to fossil fuel is very simple. The cost of the electricity going in was simply greater than the value of the hydrogen going out.

What's changed and has changed dramatically is the cost of renewable energy. And so I think the narrative around renewable energy, in my opinion, has been a little bit misplaced in that we view it as a replacement for baseload power. And while that's great, it's not a dispatchable power. So if the sun doesn't shine or the wind doesn't blow, it makes the energy not really viable. What it can do though, is you can take that same power when it does exist and convert it into hydrogen.

In very simple terms, the goal is to produce $1 hydrogen -- so $1 per kilogram of hydrogen, to convert that, to compare it to natural gas, multiply times 7.5, so $1 times 7.5. $7.50 would basically be half roughly of the cost of diesel, about the same as natural gas and that would be the end of fossil fuels. It's an ambitious goal to get there. Obviously, today, we think that the cost is anywhere from $2 to $3 to $4, so you're a bit up there away from it, but government subsidization of it, carbon taxes, and of course, the development of technology could change this narrative very, very rapidly.

Last page, Page 24. So we don't want to be the mad scientist to just find the cheapest way to create the hydrogen. We want everyone that's on the line here and other people to go and find different ways to do it. Our goal is to commercialize that hydrogen once it's actually created. So the last mile to using our gas infrastructure is where we want to really provide it. Most of the infrastructure that we are creating is entirely usable with hydrogen. The GE turbines can use 95% hydrogen today. There's -- the gas, since the molecule is not that different from the CH4 and the methane in terms of the handling of it and whatnot. So what we're doing is very much helpful in terms of providing that last mile.

Our goal in this is to be the catalyst to help people get from here to there. I believe in big tents. I believe in people wanting to be included in this whole process. It's a huge challenge for all of us but it's also a huge opportunity. We learn by doing, and so in this case, let's do. What you can do with us is partner with us. If you have proposals and you have a project that you want us to take a look at, send it into us. Jake Suski is our director of Zero. He'll be the point person for this. We have put together a library of all the hydrogen articles that are out there in the world, and so you can take a look at our library and go through this.

Now that I've mentioned hydrogen, I condemn you to now reading a hydrogen article each and every day. There's a lot of different articles that are out there in the world about this. There's many different thoughts about people and how they do it, electrolysis being the most obvious way, but there's concentrated solar power, there is burning underground oil fields. There's lots of different ways that people have thoughts on creating hydrogen. And once they do, we want to catalyze it. Our goal is to do. In very simple terms, in the next 12 months, we want to have one or more pilot projects we can actually take you down to and show you actually how it works. And so you can see in firsthand how it actually operates. I'm a doer by nature. And when we talk about the existential threat that we have.

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Ladies and gentlemen, please stand by. Your NFE fourth quarter and full year earnings conference call will begin momentarily. Thank you for your patience and please stand by.

You can hear now, Josh?

Yes. You're coming in loud and clear. Everyone can hear you now.

Operator, can you open up the call to questions?

Yes, we could. Our first question comes from Jon Chappell with Evercore ISI.

I actually had 2 questions for Wes or Chris. But actually, first, Wes, the last thing you said before you cut out was existential threat, so I feel you kind of left us there with a cliffhanger. Maybe you can just finish your thought on the existential threat.

We're talking about Zero, our new initiative to produce 0 emission power through hydrogen and so I don't really know where it cut off. Maybe one of the oil companies cut off our line because existential threat.

Probably muted. All right, I'll just move on. The first thing I want to talk about was Slide 19. Chris' slide on the potential upside from buying at the current spot price relative to the number that's in your model and ours. And if you tie that to the chart on the bottom left of Chart 18, and it just seems that LNG prices aren't going to go any lower than they are today. And I understand that there is a desire to wait until these facilities come online and kind of lock it in once you have the demand. But you do have line of sight, as you've laid out, with the facilities that are either about to start up in San Juan or the Nicaragua and Mexico. So what's kind of holding you back from just locking in the rest of the chart? It seems like there's no better time than now, and because you have that line of sight on demand, take advantage of that opportunity and lock in that upside today.

Yes. Here's how we think about it. So there's the spot market, there's a long-term market. So the contract that we signed at the end of January was Henry Hub times 115% plus about $2.50, so roughly $4.50 is the current price, given Henry Hub at $1.80 was the spot price last night. So that's a long-term contract. It runs for 8 years, 9 years and it will obviously move around as Henry Hub moves around, but that's a good reflection of where the long-term numbers are.

The short-term basis right now is the market is very oversupplied. So spot price is about $2.50. So it's a pretty healthy gap one versus the other. One of the characteristics of this commodity is it's relatively hard to store, right? So unlike -- that was running a wheat ranch, which I used to be a part of, if you didn't like the price of wheat, you just stick it in the elevator, wait until the prices went up and then sell your wheat when you wanted to. This is a commodity where you can't really shut off the production of it, and so it just supplies. And when you get an oversupply, the prices go down a lot. Prices on a spot basis are down roughly 70% year-over-year. And so to the extent that we can use cargoes in the short term, it's very valuable to us. And that's why Brannen and the development team and what their work is so important because they're getting those assets turned on, they can then utilize it. If we generate a lot more business, which we're working hard to do in the short term, you'll see some extraordinary margins, as Chris said, as we go through it.

But the general approach that we take on gas is as assets go from developing to operating, we then look to lock in supply. We've got a lot of that going on right now, the path for more of that is very, very robust. And then I think you'll see a lot of this dealt with. This is just a good snapshot on Page 19. It shows you that we've got a lot of unpurchased supply in the short run, so that's a big opportunity for us, even bigger on the long run. And we're thinking about different ways to take advantage of the market dislocation on a daily basis. It's a remarkable position to be in, through no fault of our own, but it's something we think has got a lot of upside even off of our baseload numbers.

Okay. And just to be clear, I think you mentioned in the last call that there was like 10 potential kind of bids in for you to cover that short. Are they all in that fixed-rate nature, that Henry Hub plus times and then plus like you laid out? Or are there any that are kind of fixed rate over an extended period of time?

Not fixed rate. I mean there's -- the evolution of the LNG market, it started off as being oil-based, so everything was Brent-based indices and that has really gotten dislocated to a very significant extent. Henry Hub is relevant to us here in the United States. Henry Hub is somewhat much less relevant if you're in Africa or in Southeast Asia, right? So there's different ways of buying it obviously. We think that it is decoupled to a significant extent from oil and I think it's going to remain decoupled. And I think we do have opportunities to buy stuff on a long-term fixed rate basis as well. We had talked about doing it ourselves but I think that there is -- you'll see now with these assets coming on, a lot more activity and volumes from us. And I think we'll have some good news in terms of ways that we can buy to take advantage of this.

Just one last quick one for Chris, if I may. You talked about the callability of the new loan, which I think is very important. And just thinking about the timing of potentially refinancing that and going to a more typical corporate debt structure, is it just a function of bringing the new downstream facilities and the gallons online? Or do the banks want to see more of a covering of the short then on the LNG supply side before they kind of match up supply-demand and move forward with that?

Jon, yes, the answer is much more of the former than the latter. I mean it's simply a matter of once the operating assets are showing cash flow, we will go and refinance this. We've had internal meetings about this, external meetings, so the process is underway as we're speaking.

Our next question comes from Ben Nolan with Stifel.

This is Frank Galanti on for Ben. So obviously, a big part of the business model is to build a terminal in various locations on some merits and then sell small scale to improve incremental operating margins. With that in mind, I just wanted to ask how small-scale sales are going in Puerto Rico and in Mexico.

Small-scale sales are great. We need to have the terminals on before we can actually sign up the customers and actually deliver to them. But we have a very robust group. We've just brought in a new head of logistics that we think is going to be a big boon for us. And so I think you're going to see our small-scale volumes go up fairly dramatically. And so while we're focused on your behalf, on both the analysts and the investors, on the big numbers because those are the big numbers that are turning on, we have a very, very specific and robust focus on the small-scale customers because we think not only is that good economics for us but it's really good news for them. They actually can cut their fuel bills dramatically. It cuts their emissions dramatically. And so we think that will be a big, big part of our business in the coming months and quarters.

Great. And then so you have 5 terminals operational or in progress and then 8 in discussion. I just wanted to see if there was any updates on any -- I guess, specifically on the Dominican Republic and Ireland and Angola, if there's any, I guess, bold move forward in those projects, I'd be curious to hear about them.

Yes, we don't really provide any updates on the prospective ones for competitive reasons and others. I mean all I can tell you is that the volume of inquiry that we've gotten is very substantial on the West Coast, the rest of this week. I'm in Africa all of next week. And there's a tremendous backlog of things that we think are very actionable. And as I said, people tend to lack imagination. So you can talk about doing things but as things really turn on and they can see them with their own eyes, it changes dramatically. I think our site in Puerto Rico is going to be a -- Puerto Rico is a great tourism destination. I think our site down there is going to be one of the big attractions in the coming months because it's an amazing asset. I encourage everyone on the phone, if you want to take a look at it, we think it's turned out to be a spectacular representation of what can be done in a very short period of time that is really transformational.

And so as this stuff happens, I think you'll see more and more and more of this. And I was talking with our guys in Asia late last night. There's a lot of people talking about building these gigawatt-power, gigawatt-and-a-half power in these what are somewhat fantasy projects, in my view, because countries that have a couple of gigawatts of power, in total, you talk about building 1,000 megawatts of power on top of that that's just not really actionable. 200, 300, 400 megawatts of power is something which is much more reasonable for them. So it's something that their systems, that their infrastructure can support and allows them to increment into a better energy profile than where they are right now.

That's what I think you're going to see a lot of. And the terminals are the catalyst for that. And so being able to both do the marine and terminal side as well as do the power stuff and do it all in a very efficient, very, very short time frame, and most importantly, paying for everything ourselves, we think, gives us a tremendous profile as we look at these different opportunities.

Our next question comes from Greg Lewis with BTIG.

Wes, if you could, could you touch a little bit more on the Zero. I mean that's clearly interesting. It seems like that's where the world should be heading to. I imagine this isn't the first time. It's been kind of put out there, at least with potential customers and terminals or areas where you're looking to go build a business. What's been sort of the thought or the feedback from some of those potential future customers about this decision?

Well, this is actually our initiation for it. So we -- all the stuff hit the website last night. We've spent a lot of time here. We've built up a team of scientists and professionals to look at a lot of different transactions that are out there. And this is really a call to action on our part is that we want, obviously, to have economically robust and viable business, providing power to people that don't have it. So that's a big part of it. And I want to be a great citizen to the planet, and I want to be a part of the Zero emissions team. And I've looked at a lot of different technologies. We visited a lot of different companies. I've become convinced that hydrogen is actually really the answer to it. It happens to be, coincidentally, entirely usable with our infrastructure.

So simply, if you could have -- if you have hydrogen right now and you could burn it in your turbines, you'd be burning a fuel that is not going to produce any CO2, right? So you can burn it or you can put it back into the opposite an electrolyzer as a fuel cell. So basically, think -- take hydrogen, combine it with air, it produces 2 things. It produces electricity and it produces water. So it's a 0 emissions part of it as well. I think what you're going to see in the short term is a huge transformation of the transportation businesses.

In our previous life, we invested in well over $30 billion equity value transportation, so I feel like I've got a pretty solid deal what the transportation world really looks like. 2/3 of the oil burn of the world is burned for transportation. If you ended up with $7.50 a kilogram equivalent -- or $1 a kilogram hydrogen or a 7 50 MMBtu equivalent fuel, that's 50% of the cost of diesel. And I think that that's a game-changing thing that could happen a lot faster than what people think.

On the electricity side, it's a little bit more complex because the prices need to be lower and longer, et cetera. But I think this is clearly going to happen. We want to be a part of that, we want to actually take and try our infrastructure out on this and try it out now. I mean it's a do it kind of a profile. I mean as I ski with a friend of mine, he's a famous skier, he's like, "We talking or we skiing?" It's like, "Don't talk about it." I don't want to talk about buying carbon credits and doing things that may be positive on the margin but that's not doing it. That's not a transformational thing, that's not going to actually fix the planet. I think that this is a real pathway, so it's something we're very passionate about.

Okay. Great. Sounds good. Looking forward to watching this happen.

Our next question comes from Devin Ryan with JMP Securities.

Great. Congratulations on the progress. I guess, first one here for Wes. You're about a year from the IPO and it sounds like you're essentially living on an airplane. And you're in the process of getting the story out and educating the market. And Wes, you also spoke about kind of the opportunity versus the challenge of blazing somewhat of a new path. And so as you're trying to think about it, as you guys gain more critical mass and really proof-of-concept where this will be a critical year, can you talk a little bit about kind of the sale process, if you will, kind of where you are in that? And do you feel like the cadence of new contract or terminal opportunities is going to accelerate materially because it would feel like you're kind of setting the path for what could potentially be a meaningful acceleration?

Yes. I mean I think -- look, we went public last January 31. It's been a year, just a little over a year since we've done it. I think when you look back at what we had forecasted would happen, it's pretty much all happened in pretty much the same time frame we've done it, so I feel good about having delivered on what it is. I think the company's profile changes dramatically once you go to cash flow. So the positive margin, even though it's modest in the fourth quarter, is a big milestone for us. The first quarter will be a substantial increase from that. And as Chris said, we're kind of well under the races for the rest of it.

The pipeline has accelerated dramatically. And again, this is proof-of-concept of getting things built. So we've gone from Jamaica to Puerto Rico to Mexico to Nicaragua, and there's a very long list of other countries behind that. And it is a case of doing 2 things: one is going out, finding new opportunities and building when you actually commit on it; and two is then spending time with investors, educating them on the story, I'm going to make that a big part of my mission here over the next 3 to 6 months is get out and introduce people to it. We don't need capital, we're self-funded, which is a great profile to be in. I think we can build this into a very, very significant company. That's our mission about it and do a lot of good along the way.

And so it's just a matter of doing both those things. It does require a lot of travel, the whole -- the coronavirus and the health issues worldwide are serious ones, and that's something that obviously impacts that. My own travel profile hasn't changed a great deal. So as I said, I'll be gone the rest of this week. I'll be in Africa most of next week. We've got a lot of different places to go. And I think that this is going to be an extraordinary year for us.

All right, terrific. And maybe just a follow-up here to dig in a little bit more on Slide 7, the math on the terminals and kind of the operating margin goals. I'm just curious, is the first terminal as profitable as the 20th, in that 25% to 35% range? Or is this more of an illustrative model, kind of an average of a fully scaled terminal platform? Because I'm assuming there's going to be even more opportunities of, call it, economies of scale. So I'm just trying to get some perspective on any orders of magnitude there, kind of the first versus, call it, the 20th terminal.

Yes, the profitability really is driven by the aggregation demand you end up in markets, right? So you start in a place, and Brannen said it well, once we find an opportunity, it's got 200 or 300 megawatts' worth of power as a proxy for that that's enough volume to catalyze the building of a terminal, the building that power and generate a really attractive return to start with. In the infrastructure business, if you want to lose all your money, you build the infrastructure for one purpose and don't use it, right? The toll road that never gets driven on as an example of that.

If you want to make all the money, you build it for 1 purpose and you use it for 2 or 3 or 4. And that's exactly what we're seeing in Jamaica. We're going to see that, I think, in spades in Puerto Rico, in Mexico, et cetera, et cetera. So that's -- the profitability of it is as you get larger, you get more profitable. And so that's kind of the Bernoulli's principle of math that's applied here, so the bigger get faster, and that's exactly what I think we're going to see.

And I think we definitely see a lot of competition in terms of people being willing to do one element of it, provide shipping to sell LNG, to build infrastructure, to build power. What we don't really see are people that can do it comprehensively, that have the credibility of doing so have the balance sheet and the capital to do so. So it's a competitive world, but I really like our competitive position. And every day that we turn on more and more volumes, we become more and more competitive with it. So that's a good place to be. So we just have to execute now.

Our next question comes from Craig Shere with The Tuohy Brothers.

On the Zero initiative with the project target in the next 12 months, can you comment on the CapEx cost and margin involved in that? Would the initial economics be lower than the LNG infrastructure? And is this an all-or-none proposition? Either you're doing hydrogen or you're doing LNG? Or can you really do a blend through your facilities and end in the burn at the power plants?

Yes. The answer to the second question is, absolutely, and that's really the way it's going to happen. It's not going to be -- you're not going to wake up one day and say, "Let's turn everything off from gas and turn on the hydrogen." That's just not practical nor is that actually at all the plan. There's a utility in England I'm going to try and go see here sometime in the next couple of weeks. They're talking about building an industrial scale electrolyzer then injecting up to 25% of that into their system, again using their pipelines of gas plants as it is. That's a good, I think, proxy for how you might see it.

We think that there's a lot of different technologies that could apply and that's the open tent. We want people to come in. And if you've got something you think makes sense, give Jake a call, send us an e-mail, we'd love to take a look at it. And as with anything in a new and developing market, you're going to kiss a lot of frogs, right? There's going to be a lot of things we're going to look at that won't make sense economically. I'm personally prepared to invest capital in this. I think it's a good investment by the firm to invest capital on this, and it's a process. And I think 10 years is a short period of time to try and become an emission-free company, but I think that the world needs a short period of time.

I think that honestly, when I see people talk about like carbon goals of 2050 and 2040, I'm like I'm too old to wait for 2040 and 2050. I just don't think -- and I think the world's not really in a place where that's a reasonable time frame. So I do think this is going to happen a lot faster than what people think. I think you'll see it happen in the transportation businesses more quickly, whether it's trucks or it's cars or it's ships, those kind of things, but I think power is not that far behind it. So we want to find a project or 2, the raw economics. We can talk about it on paper, but like let's go do it. Let's see what it actually is. We'll actually like then have a real baseline to kind of start from and then trying to improve on that to get to a place where it really makes sense.

Understood. Is a good analogy just like biomass and coal fired?

I mean it is. I think in order for something to be really interesting from my perspective, it has to be very scalable. And hydrogen has the potential to be very scalable, exists in a lot of different forms in nature. We've seen a lot of different proposals on people that think that they can produce mass hydrogen on doing stuff that seems crazy on paper at $0.50 or $0.75 or whatever.

Just the raw math, just to kind of walk you through it. If you had $0.02 power and you have an electrolyzer that had 100% efficiency, that would create $0.80 a kilowatt-hour -- or kilowatt hydrogen, right? So to give you context versus the dollar. Now none of the electrolyzers are 100%, baseload power, $0.02 is obviously a lot to go, but it's not an unattainable one. And so just based on electrolyzer math, you can get pretty close to it if you hit this. And there are people all over the world that wake up every day that are trying to figure out a cheaper way to do it. It's like I said, we've seen the concentrated solar power guys. Those guys claimed that they can produce it at prices that are similar to that.

We saw a proposal from a firm and said, take a depleted oil field, pump oxygen into it, light it on fire, it mass-produces hydrogen, which doesn't sound that crazy when you actually kind of go through the science of it. That may be a way to produce a lot of hydrogen. I think there will be a lot of people up in the world that want to do it. As I said, I don't want to be the mad scientist trying to figure that out. I want to basically be the commercializer of it. I think that's our role and being able to take and put it into our systems, in part, I think, is a great accompaniment to that and of course, to provide capital and be a part of that, and that's what we want to do.

Understood. Real quick, the $2.50 figure you said in addition to the Henry Hub plus, that $2.50 includes both the fixed fee liquefaction as well as the shipping, is that correct?

It does, it does. There's obviously -- it's a really good question because there's lots of quotation conventions that need to be clarified and people do it. But you can think a long-term basis, $4.50, $4.75, that's very much in the cards. We're using $5.50 because we've got some old contracts and it's just a good number. Spot prices are materially less than that. So the faster brand can turn stuff on, the faster we can get new opportunities that he can then turn on, the more we're going to be able to take advantage of the spot rates that are out there.

And, Wes -- and another question, you mentioned the possibility of low-cost long-term fixed rate. Can you remind us what your downstream contract mix is in terms of Henry Hub plus versus fixed?

It's almost all Henry Hub. We've got some modest amount of fixed rate stuff. We have some modest stuff that's done, but the bulk of it is really indexed. So we're not really exposed on that side. And as I said, through no fault of our own, prices have come down dramatically. And obviously, the whole China situation, those guys use a big chunk of the world's LNG, so there's been a lot of issues around that as well.

Great. And very last question. Wes, you mentioned about self-funding. By our math, the Nicaragua project is like the largest thing you've ever done and may consume the bulk of the liquidity that you got from the $800 million terminal financing. When you think about whether it's DR, Angola, Ireland or maybe other 5 or what-have-you projects that haven't been disclosed that you're in discussion on or maybe some add-on project in Puerto Rico to solve their problem after the earthquake. When you think about financing all this, do you think you're going to need to tap the markets again? Or you're going to be free cash flow and combine that with a little more project finance? How do you see this going forward?

Well, I think let's just talk about leverage on this. And so use the $450 million number that Chris has said that that's what our stuff is up and running, take off $80 million, that's $370 million, multiply it times 15, that's $5.5 billion in asset value. Right now we have about $1 billion in debt against it. So just from a standing start, $1 billion against $5.5 billion doesn't sound that highly leveraged. In fact, it's not that highly leveraged. And so I think we have absolutely the ability to incrementally tap debt markets to fund stuff. And of course, $450 million in free cash flow is a lot of free cash flow.

So the 2 -- the combination of those 2 things, modest amounts of incremental debt as well as just the free cash flow from the business, we think, is going to be self-funding. If we tagged one of the bigger opportunities, and there's a couple out there that are very, very significant, then it might be something we'll come back and revisit. But I'm the biggest shareholder, we're very focused on not diluting shareholders. But as I say, it's not -- if it's accretive, it's not dilutive. If there's really an opportunity that we thought made so much commercial sense that we wanted to go raise capital to do it, we would do so.

In our filings, you'll see we're a 1-year-old company, so we're going to file a shelf so we can actually access the capital markets if it made sense. That's not a sign that we intend to do that. And as I said, that, in fact, the opposite is true. We don't intend to do that. But there's a long list of things that are out there, a couple of them are very material. If we needed to do it, we think it would make sense, and we think the investors would support that. But I think in the ordinary course, we think we can actually absolutely self-fund through incremental debt and free cash flow.

(Operator Instructions) Our next question comes from Hillary Cacanando with Odeon Capital.

Just on Nicaragua, with 85% on take-or-pay, could you talk about how the remaining 15% of the contract is structured? And also just do you have an FSRU picked out for the project? And what's the required capacity with the FSRU?

Chris?

Yes. So the Nicaragua contract is 85% of the 300 megawatts that are installed. The remaining capacity can be called by them as the grid needs. The country is dramatically under-electrified at this moment so we would expect this best to exceed 85%, but the model is take-or-pay and so that's what we've assumed in our base case numbers. The FSRU that we will use to service the Nicaragua terminal will be just offshore and very similar design to Old Harbour. That FSRU will have send-off capacity well in excess of the gallons required to service 300 megawatts. So certainly, as you see expansion in that market, you could have additional volumes consumed.

The other thing I'd mention is its strategic location. The FSRU for Nicaragua can serve as regional storage for our Pacific operations, so there are synergies that we would expect to see by servicing the La Paz terminal as from storage in Nicaragua in addition to potential material bunkering opportunities as we're very close to the Pacific side of the Panama Canal.

Okay, sounds good. And also could you just talk a little bit about your plans for Pennsylvania and other potential liquefiers? Just, I guess, with what's going on in the LNG supply market right now, have your plan changed at all or your view about the upstream build-out?

I mean obviously, the price is going down 70% is a good thing for us. And so in the short term, we're not actively building on Pennsylvania. We've done the work out there. We've got a fully permitted facility. We have a rail permit. So we have the pieces in place to do so. And we think that long term, there's going to be very significant benefits from doing that, both in Pennsylvania as well as other parts of the United States.

In the short term, our focus is on the development assets, cash flow, building the company as we're talking about it, but I think it's an amazing error to have in the quiver to have access to that part of the world. We think it's obviously a gas abundant part of the world. We think that actually having the platform that we have in place is valuable, and that's something we will keep in the quiver. When it makes sense, we'll pursue it.

Just one more question. So you clearly have a first-mover advantage in these markets, but could you just talk a little bit about the competitive landscape with Golar having a similar business model in Brazil through their strategic project? Just wanted to find out if you're seeing any other players looking to get into the downstream market with the similar model.

Yes. I think -- there's a lot of competition in the world. I think what the Golar guys have done in Brazil is terrific. And I think that they're following a very similar path in that they've tried to lock in a big long-term deal on a power plant, and they're now looking to expand in the small-scale stuff, and that's our playbook that we've used. So I think that -- obviously, we think that makes a lot of sense. The good news is, it's a pretty big world. There's 1 billion people who don't have electricity. There's 3 billion, 4 billion people that can't afford electricity. It's a gigantic world that is out there. And what we have not seen on a daily basis is people that are willing to do -- were willing to do from end-to-end and pay for everything. And so I'm not complacent about the competition.

I feel about it, less concerned about it today than I did a year ago because I know how hard is to actually make all this happen. It's pretty simple to talk about. It's pretty simple to lay out in paper and showing to you the economics. It requires a very, very capable group of people and a lot of focus, and we're fortunate to have both of those things. And so I like our position for sure but it's a competitive world. There's no doubt about it.

And I'm not showing any further questions at this time. I would now like to turn the call back over to Alan Andreini for any further remarks.

Thank you all for participating on today's call. If you have any follow-up questions, please feel free to reach out to me, Josh Kane or Jake Suski. Our contact information is on our Q4 press release. Finally, we look forward to updating you after Q1. Thank you.

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