New Fortress Energy Inc. 2018 Form 10-K Summary
Business context and reporting period
The filing covers the year ended December 31, 2018. Historical financial statements are presented for New Fortress Energy Holdings LLC, the predecessor of New Fortress Energy LLC for financial reporting purposes. New Fortress Energy LLC was formed in August 2018 and completed its initial public offering in February 2019.
The company is an integrated gas-to-power business focused on LNG procurement, liquefaction, logistics, shipping, regasification and delivery of natural gas, power and steam. At year-end, operations were concentrated in the Miami, Florida liquefaction facility and the Montego Bay, Jamaica terminal. Other terminals, power plants and liquefaction assets were under development.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $112.3 million | $97.3 million | 15.5% increase |
| Operating revenue | $96.9 million | $82.1 million | 18.0% increase |
| Operating expenses | $170.8 million | $122.3 million | 39.7% increase |
| Operating loss | $58.5 million | $25.0 million | Loss increased $33.5 million |
| Net loss | $78.2 million | $31.7 million | Loss increased $46.5 million |
| Net loss per share | $1.15 | $0.49 | Higher loss per share |
| Cash used in operating activities | $93.2 million | $54.9 million | Use increased $38.3 million |
| Capital expenditures and investing cash use | $177.5 million | $52.4 million | Use increased $125.1 million |
| Cash and cash equivalents | $78.3 million | $84.7 million | Decreased $6.4 million |
| Total assets | $699.4 million | $381.2 million | Increased $318.2 million |
| Total debt, carrying value | $272.2 million | $75.3 million | Increased $196.9 million |
Revenue increased primarily from higher LNG volumes delivered to small-scale customers and additional Montego Bay sales. Delivered volume from the Miami Facility increased to 10.6 million gallons from 8.3 million gallons, while Montego Bay deliveries increased to 99.2 million gallons from 86.3 million gallons.
Cost of sales was $95.7 million, or approximately 85% of revenue, compared with $78.7 million in 2017. The reported operating margin was approximately negative 52%, and the net margin was approximately negative 70%. Selling, general and administrative expense rose to $62.1 million from $33.3 million, principally because of increased development activity, headcount and professional fees.
Material changes versus the prior comparable period
- Revenue growth was outweighed by substantially higher cost of sales, development spending and corporate expenses.
- The net loss more than doubled, increasing from $31.7 million to $78.2 million.
- Operating cash outflow increased to $93.2 million, while investing cash outflow increased to $177.5 million as construction accelerated.
- Construction in progress increased to $254.7 million from $35.4 million, reflecting work on the Old Harbour Power Plant, CHP Plant and Pennsylvania Facility, among other projects.
- The company replaced the Miami and Montego Bay loans with a Term Loan Facility. At December 31, 2018, $280.0 million of principal was outstanding under the facility, with a carrying value of $272.2 million after financing costs.
- The company recorded a $9.6 million loss on extinguishment of debt, primarily related to refinancing and write-offs of deferred financing costs.
- A significant customer represented 87% of total 2018 revenue, compared with 92% in 2017. The company remained highly concentrated in Jamaica and Caribbean customers.
Liquidity, debt and commitments
At December 31, 2018, the company had $78.3 million of cash, $22.6 million of restricted cash and $272.2 million of debt carrying value. The Term Loan Facility was scheduled to mature on December 31, 2019, with two optional six-month extensions. It carried interest at either a LIBOR-based rate plus 4.0% or a base rate plus 3.0%, subject to specified floors and covenants.
Subsequent to year-end, the company drew an additional $220 million under the Term Loan Facility, bringing total principal outstanding to $500 million as of March 21, 2019. Management stated that it expected sufficient liquidity, operating cash flow and access to capital to fund the next 12 months, but also expected to require additional borrowing, equity capital or asset sales to execute its strategy.
Contractual obligations disclosed at year-end totaled $990.7 million, including $298.2 million of debt obligations, $631.6 million of purchase obligations and $60.9 million of operating lease obligations. The company also had substantial LNG purchase commitments and a commitment of up to approximately $180 million for the Jamaica CHP Plant.
Guidance, outlook, commentary and unusual items
- The Pennsylvania Facility was targeted for completion in the first quarter of 2021 under a January 2019 EPC contract with an approximately $672 million price, including a $162 million provisional payment and potential bonuses or change orders.
- The company targeted commercial operations at the Old Harbour Terminal in the second quarter of 2019, the San Juan Facility in mid-2019, the La Paz Terminal in the first quarter of 2020 and the Pennsylvania Facility in the first quarter of 2021.
- The company expected to continue sourcing most LNG from third parties pending completion of its own liquefaction capacity. Third parties supplied 92.5% of LNG volumes in 2018.
- The March 2019 PREPA agreement covered natural gas supply and conversion of San Juan Power Plant Units 5 and 6. PREPA was in bankruptcy proceedings, creating counterparty and payment risk.
- The Ireland Terminal faced a judicial challenge to planning-permission extensions. The company intended to seek replacement planning permission before construction and required sufficient downstream contracts to support development.
- The company did not have commodity, interest-rate or foreign-exchange hedging arrangements at year-end. A 1% change in the interest rate on a fully drawn $500 million Term Loan Facility would affect annual interest expense by approximately $5 million.
- New Fortress Energy Holdings controlled approximately 87.6% of voting power through Class B shares. The company was a controlled company and intended to use exemptions from certain Nasdaq governance requirements.
- The company did not plan to pay regular cash dividends in the foreseeable future.
- Management reported effective disclosure controls as of December 31, 2018. However, the filing notes that a significant deficiency in internal controls had been identified in connection with the 2017 financial statements and that no auditor attestation was required during the applicable emerging-growth-company transition period.
Important facts for investors to verify
- Verify the post-year-end debt balance, maturity extensions, interest rates, covenant compliance and refinancing requirements for the $500 million Term Loan Facility.
- Assess whether operating cash flow and available financing are sufficient to fund the Pennsylvania Facility, CHP Plant, terminal developments and working-capital needs.
- Review construction progress, final costs, permitting and commissioning status for the Old Harbour, San Juan, La Paz, Ireland, Dominican Republic and Pennsylvania projects.
- Evaluate customer concentration, especially dependence on Jamaican counterparties, PREPA and other government-affiliated or developing-market customers.
- Analyze exposure to LNG supply costs, third-party procurement, shipping capacity, Henry Hub and LNG price volatility in the absence of hedges.
- Review the Ireland planning challenge, PREPA bankruptcy and other permitting, regulatory, environmental and contractual contingencies.
- Consider related-party arrangements with Fortress affiliates, including management services, leases, aircraft chartering and the company’s controlled-company governance structure.
- Reconcile predecessor-company historical results with New Fortress Energy LLC’s post-IPO financial statements and non-controlling interest presentation.