New Fortress Energy Inc (NFE) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the NFE Third Quarter 2020 Earnings Conference Call. (Operator Instructions) 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 Kane, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you. I would like to welcome you to the New Fortress Energy Third Quarter 2020 Earnings Call. Joining me here today are Wes Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer; and Sam Abdalla, 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.

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 would be helpful to have you have it in front of you.

So with that, let's turn to the beginning and start with Page #4. We had a very, very productive quarter. It's our first full quarter in our COVID world. We had a number of initiatives 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 10 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've 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, we 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, development for us, both our large-scale developments in 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 were modest. And the -- I'll have Sam go through them here in just a few minutes, but the tagline is 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 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 show -- speak for themselves here shortly.

On 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 2 projects we announced this -- in just recent days, first investment that we made in the electrolysis company, an Israeli company, we made a small investment here a few days ago. Also established a joint venture to run hydrogen to create basically the first hydrogen-burning power plant here in the United States to give field data for us. So that's great, but there's a lot to talk about there. And then Chris can go through the finance and operations, of which there's a lot to -- again, a lot to report on.

So with that, if you flip to the next page. On Page 5, July 10 was the date when both of the turbines turned on. And for the most part, they have been running very reliably ever since. This is a photo 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 is Jamalco company in Jamaica that's a bauxite company. They switched over their boiler operation from HFO to gas, so dirty field to clean field. That's a big win for the environment, also as 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 6. 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 variabilities, 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 I'll flip to the next section, I'll talk about the developments. I'll turn it over to Sam. Sam?

Thank you, Wes, and good morning, everyone. Our business is about terminals and customers we supply from those terminals. Currently, we have 3 terminals in operation and 2 terminals under construction.

The 2 under construction, and I'm moving to Slide 9, are largely on track, and we achieved significant milestones. Talking about La Paz, the Mexico terminal, we encountered a couple of months of delay because the -- 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. So we filed for a new generation license. And we achieved and we got the preliminary approval from the authority. So we went ahead and bought new land, and we filed for the permits, and we actually received the construction permit for the new land by next -- last week. So we'll keep you posted. We don't -- 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 contract with -- EPC contract with the power plant contractor, and they are mobilizing to the site next month.

So moving to Slide #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 9 under construction. What you will see in the picture here on Slide 10, this is the Bimini project, 9 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 2 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, the -- out of the 9 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 9 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 11. And this is about the ISO Flex. As a quick update on the logistics for the ISO Flex, 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 2 barges that we will purchase within a couple of weeks. The manifold, our proprietary manifold, is also under construction with completion by December of this year.

Great. If you look at the -- 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 basically skip 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 3 to 6 months. So it's a huge change across that the first 2 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 briefly to the new business side on Page 14. As I mentioned earlier, we reorganized our sales into 2 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 think I'm very happy with the people that we have brought in. The organization that we've created [and the good] results will speak to themselves here shortly.

If you look on Page 15. Just to take a quick look at the -- what organic growth really means. Here are the 5 terminals that are under construction and are 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.

So this is a -- it's 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 one of the real engines of growth for us cash flow-wise next year.

Page 16, the new -- 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 6 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 several hundred companies in the world, we think that 2/3 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 3 characteristics are: a, large populations; b, significant existing power infrastructure and, 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 4 circles I show you, there's 8 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% or 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 2 new projects between now and the end of the year. 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 2 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 5 years.

Turning to hydrogen a little bit. And I've 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 an 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, 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.

That -- 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 19. Just again, to give a little bit of context, the hydrogen that we are looking at in our projects can come from 3 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, really 3 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. And although they are similar to the technologies that are used right now, the significant difference is they can be made entirely clean, we believe, and I'll talk about that in a second.

So the best price, at the bottom here. I draw lines under and just for reference. And 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? Well, 3 sectors, power; industrial and transportation combine to about 80% of all emissions. So in very simple terms, it wouldn't be perfect, but if you could actually turn those 3 sectors from burning dirty fossil fuels to burning clean hydrogen, you go long ways towards cleaning up the CO2 in the atmosphere for us.

So on the right-hand side, I put a box together that just shows in dimensions what the relative competition is of fossil fuels versus hydrogen today. So as I said, if we are able to generate hydrogen at $1 a kilogram, right, to convert that into an MMBtu of coal, then 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, cost 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 is created is at about $1.25. $1.25 times $7.5 is about $9.5. So the dollar -- 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 2, you say, on paper, day 1, the electrolyzer could have the biggest impact potentially on transportation, the other 2 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 1 or 2 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 yourself, then you need to actually produce it cheaper.

So Page 21, the goal is actually very simple. It's 0 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, It's the -- as I say, it's the hippocratic oath of hydrogen, first do no harm. If you're not creating emissions and, 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 has less -- is less important to categorize it that way than in 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 and its pyrolysis, this method of 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 like 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 earn 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 2 things. Long Ridge, which is the photo there. This is a -- it 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 a -- that's going to be a big experiment for us and something that's going to be very productive.

On the right-hand side of the page, this is a company that we invested in called H2O Pro -- or H2Pro. It's an Israeli-based electrolyzer. It basically is a much more efficient way of electrolysis. In simple terms, it's got 2 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 for 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 we actually -- our company has been coming to work since the 1st of June. Once COVID happened, again, my point of departure was when Adam Silver, like, suspended the NBA season on March 11, a few folks came on the 12th. There was a handful that ran on the 13th and it was a new world. At the end of the day, our office here in New York, on the following Monday, there were 12 people and my dog. So that's -- we were socially distanced because there'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 let 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 into all of our field personnel, we paid them basically a bonus of 150% of their salary for those 2 months to -- 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 totaled up to about $1 million in costs, so it's not free to do this, but the results have been really terrific so far. Chris?

Yes. 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 the 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 6 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 8 construction projects, signed 8 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 26, I'll quickly walk you through the summary of financial information for the quarter. The biggest driver of our results, as you know, and as you've already heard, are volumes. We averaged over 1.5 million gallons per day for the quarter. And 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 Jamalco refinery boilers. Revenue for the quarter increased $42 million, which is a 45% increase over Q2. And despite the large increase in volumes, the cost of sales is 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 nondevelopment cash SG&A expense for the quarter was $19 million, which is just underneath the $20 million we are forecasting and on track for $80 million for the year. One thing to call out is we had $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 cost 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 to the growth -- 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 million for Q4 on our way to 3.5 million 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 baseload consumers.

Finally, moving on to Page 28. On our Q2 earnings call, we laid out a road map 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 2.5 years and will lead to $23 million of interest reduction for 2021. The notes have traded exceptionally well post the offering, currently at [1 06], 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 matured company.

Following our refinancing, we instituted a quarterly $0.10 per share dividend, which represents 20% to 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% to 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'll turn the call back over to Wes.

All right. To questions, please.

Great. Operator, we'll open up to questions.

(Operator Instructions) Our first question comes from Sean Morgan with Evercore ISI.

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

Well, generally, the answer is that they are committed. I mean we have a range of contracts that 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 look 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 or 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 cost 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 flatout not the way that it is. So I think if you're -- 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...

Sean, I think we lost you.

I'm curious if you have a lot of -- any clarity that you can disclose in terms of what you've recontracted and what your kind of gas prices starting to shape up for 2021. And how much of that is hedged and how much of that's 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 is a fire of -- 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 the 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. We feel really good about this right now. I mean in Q3, we bought gas sub-$3. Q4 will probably be, in context wise, around $4, even though the market is $5-plus 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...

And our next question comes from Devin McDermott with Morgan Stanley.

So's the first one I wanted to ask on is hydrogen, and I appreciate the additional time and detail you provided on this call. And also, congrats on the significant steps you've taken 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 in 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? I'm really just trying to framing up the next few years in terms of the opportunity set and capital allocation around this opportunity.

Yes. Well, there's 2 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 about this is to try to find a technology, try to find a process, try to 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, in which we 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 up perfectly. And I laid it 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 the 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. It's a very counterintuitive thing. And so I don't -- 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 it's -- 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 0 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, and 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 economically, that unlocks a huge new store of value. I mean I joke about it with our guys here. My great state of Montana has massive coal reserves. You can end up with Montana and Wyoming being mini Saudi Arabias of hydrogen production. And I know that sounds fanciful, but go on to 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, and it may not be ultimately the best, like, 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 of -- 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 doing well by doing good, and it's something that I'm very, very focused on, we're very focused on. We've got a great team of people that are working on this stuff. And so I think we will make a follow-on investment, my guess is, 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? $0.50 or less, you can do it with clean, emission-free production, you will see a massive transference over.

And so it's very clear to me now what the path is. And I think the electrolysis has got a lot of like -- 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, as I said, the 3, 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.

No. That's great and really helpful context. And my second question, I'm going to switch you a bit to the growth opportunities you have within the existing portfolio. And 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 9 customers you've executed on so far. In the remarks, you also talk about 190,000 of a small scale within the portfolio. So just kind of bridging those 2 numbers and thinking about what's likely to come here over the next 12 to 18 months.

Yes. I mean to answer the first question, there's no constraints at all. As I've often said in the infrastructure business, if you -- 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 2 or 3 or 4, that's how you make outsized returns in the business. And so this is just simply like 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.

And so 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. And so 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. So that's a really big focus for us.

And then 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.

Our next question comes from Joseph Osha with JMP Securities.

I wanted to return a little bit to this issue of hydrogen in the transportation market because the price points there that, that market will bear are potentially higher, particularly if you look at running hydrogen and fuel cells.

So I'm wondering if you look at like what might be economically viable there doing electrolysis on site, as you talked about, Wes, whether that might work at, say, $1.50 a kilogram or something.

Yes. 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 looked at when we built this business as our core business because we knew that once we solve 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 a different company here. We own 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 they 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 showed 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-out 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 though it's electric vehicles, there's been a pretty slow build-out for the infrastructure to support these like charging stations around, and there's a lot of analogs you can draw between the 2.

Now one thing I'd say about this, and I think it's a miracle that more people don't talk about, people have 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 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 us in 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 work 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 us.

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-out. But things like municipal buses, things like garbage trucks, things that 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 talk 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...

Yes. For sure. Can I ask a follow-up? Actually, it's not a follow-up. It's 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.

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 of 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 what I -- this is what really kind of got me really focused on the whole hydrogen thing is that if you have hydrogen, that is effectively the battery that you need to like support you on days like today, and so -- 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 I think -- and also, you also have to think about it, like, I'm trying to be very, very intellectually honest about looking at the process of creating the hydrogen and looking at it, how we create, how clean it is, et cetera, we should apply that same rigor to creating batteries, right? So if you can actually make a battery, there's a whole bunch of stuff that goes into it, and 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. And 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.

But 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 the existing thermal power. And my first big discussion 2 nights ago with one of the Asian customers, it is deadly serious about converting out of a big coal-fired operation into natural gas. So -- and 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 worlds. So...

Our next question comes from Christine Cho with Barclays.

Wes, you guys have worked hard to get to a position of being free cash flow positive in your base business and maybe distinguished yourself a bit from some other clean-type companies, clean energy. So this might be a bit of a longer-dated question. I was 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 we see you guys come to market in conjunction with one of these investments and that's how you kind of increase the flow of the stuff?

Yes. It's -- 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 in 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. So I really believe that when the 2 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. And 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, 300, 400, 500 megawatts in projects and then do that over and over because the economies are big and growing.

And 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 where the whole focus is on. The logistics chain, the ISO Flex, the ability to get to 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 million to $300 million for a 300-megawatt 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 2 or 3 or 4 or 5 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 we use.

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. 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 the time of COVID, where it's a challenge, frankly, to you get in front of people and you are meeting people on Zoom calls rather than in person. But this too shall pass. We've made a lot of progress over it. Knock wood, I think we'll 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 is, as I said, 2 new material projects done by the end of the year and 5 to 10 next year. Those are lofty ambitions, but I think that they're -- the foundation for them is actually set with the infrastructure we're putting in place. So...

That was really helpful. 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 there in the letter. You can see back our response. We feel 100% good about our position and -- but we haven't heard back from them. So we ask for them to respond expeditiously. They didn't. So I don't control that. But no, we feel very good about our position. So...

Our next question for today and our last question for today comes from Ryan Levine with Citi.

What do you anticipate is the most efficient way to transport hydrogen to some of the 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. The 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 in the pipelines, right? So we talk to the technical people, I guess, the atom is so small, 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 it actually obviates 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 laid 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, like, so kind of 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 tower 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 like dirty way. And I think it's amazing. I put those numbers there. Maybe it 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 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 this ammonia when it gets there in some way, shape or form or you have a fairly simple cracker in place and actually split it back out.

So -- but your question is like spot on, a great question. You will, 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's actually -- 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. And once we get to one, two is in the [gun sight], three will be a big part of the solution for it, though. So I think there's some good options.

Thank you. And 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.

Great. Well, thanks, everyone, for calling in. Obviously, we're happy to follow up on any follow-up questions through Josh or anybody else in the Investor Relations group, and we look forward to talking to you after our next quarter in the New Year. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude your program, and you may now disconnect.