New Fortress Energy Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unless stated otherwise, amounts below are U.S. dollars in millions. NFE is an integrated gas-to-power infrastructure company, with operating assets in the United States and Jamaica and development activity in other markets. Its principal operations serve customers in Jamaica and Puerto Rico.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $136.9 | $49.7 | $306.0 | $119.4 |
| Operating income (loss) | $11.1 | $(47.7) | $(173.4) | $(151.0) |
| Net loss | $(36.7) | $(54.4) | $(263.5) | $(165.9) |
| Net loss attributable to stockholders | $(36.4) | $(6.7) | $(182.3) | $(26.5) |
| Basic and diluted loss per share | $(0.21) | $(0.30) | $(2.14) | $(1.34) |
Q3 gross profit, defined as revenue less cost of sales, was $65.2 million (47.6% of revenue), versus $3.8 million (7.7%) a year earlier. Nine-month gross profit was $96.2 million (31.4%), versus a gross loss of $3.9 million (negative 3.2%). Q3 operating margin was 8.1%; nine-month operating margin was negative 56.7%.
- Revenue growth reflected higher Old Harbour volumes, commissioning and development services in Puerto Rico, and power and steam sales from the Clarendon CHP Plant, which began commercial operations in March 2020. Q3 development services revenue included $52.0 million for gas used in commissioning customer assets.
- For the nine months, operating cash used was $115.7 million, compared with $154.8 million in 2019. Investing cash used was $115.7 million, versus $295.0 million; capital expenditures were $115.8 million. Financing provided $291.8 million, and cash, cash equivalents and restricted cash ended at $153.4 million.
- At September 30, cash and cash equivalents were $112.7 million; total current assets were $280.5 million and current liabilities $222.3 million. Working capital was approximately $58.3 million. Restricted cash totaled $40.7 million.
- Long-term debt carrying value was $980.2 million, representing $1.0 billion principal of 6.75% senior secured notes due September 2025. The notes have no principal payments due before maturity. Total liabilities were $1.30 billion.
Material changes versus the comparable period
- Q3 revenue increased $87.2 million year over year, and operating results improved by $58.8 million to operating income. Nine-month revenue increased $186.6 million, but the company remained in a substantial operating loss.
- Nine-month results include $124.1 million of LNG contract termination charges and mitigation-sale losses: a $105.0 million payment to terminate remaining 2020 Centrica cargo obligations and $19.1 million of mitigation-sale losses. These costs were absent in 2019 and were recorded in the first half, not Q3.
- Q3 included $23.5 million of debt-extinguishment loss; nine-month loss was $33.1 million. The company issued $1.0 billion of secured notes in September and used proceeds and cash on hand to repay the $800 million Credit Agreement and redeem secured and unsecured bonds.
- Comparisons of stockholder-attributable loss and EPS are affected by the June 2020 exchange of NFI units and Class B shares for Class A shares. Before the exchange, a larger share of consolidated losses was attributed to non-controlling interest; total consolidated net loss is more directly comparable.
- Assets expanded as facilities entered service: net property, plant and equipment rose to $622.5 million from $192.2 million at year-end 2019. The balance sheet also reflects adoption of lease accounting, including $140.1 million of right-of-use assets and $120.2 million of lease liabilities.
Outlook, management commentary and risks
- Management said it expected available liquidity, cash flow from operations and recent borrowing proceeds to fund capital expenditures and working capital needs for the next 12 months; it also noted potential future debt or equity financing. No numerical earnings or revenue guidance was provided.
- NFE reported approximately $856 million of assumed expenditures for completed and existing projects, with about $737 million spent through September 30. It expected to fund these projects with cash on hand and operating cash flows. This estimate includes completion of La Paz and planned expenditures; project timing and costs remain uncertain.
- The company terminated its 2020 Centrica purchases to access lower-priced spot LNG and said it expected to continue buying on the open market for the rest of 2020. It has a separate supply agreement for 27.5 TBtu annually from 2022 through 2030, indexed to Henry Hub. LNG prices, supply availability and customer demand remain material risks; NFE reported no current commodity hedges.
- Management said it had not experienced significant COVID-19 disruption and had not seen deterioration in customer collection timing or volume, while acknowledging continuing uncertainty. Certain customer contracts have take-or-pay minimums, but revenue and cash generation depend heavily on a limited number of customers, including public-sector-related counterparties; PREPA is in bankruptcy proceedings.
- FERC asked NFE to explain why the San Juan Facility is not subject to its jurisdiction under the Natural Gas Act. NFE replied that it does not believe the facility is jurisdictional; FERC’s response and outcome were unknown at filing.
- Total disclosed contractual obligations were $3.02 billion, including $1.34 billion of long-term debt obligations, $1.52 billion of purchase obligations and $159.6 million of operating lease obligations. The filing identifies construction delays and overruns, regulatory and permitting uncertainty, LNG procurement and price exposure, customer concentration, leverage and foreign-market risks as significant concerns.
- The company ceased to qualify as an emerging growth company after issuing the notes and expected additional reporting and audit costs, including a future auditor attestation on internal controls. Management assessed disclosure controls as effective at September 30, 2020.
Most important facts for investors to verify
- Whether operating cash flow and cash collections improve enough to support the planned capital program and debt service.
- How much of revenue and future cash flow depends on commissioning and development services versus recurring contracted operations, and the timing of remaining commissioning activity.
- Progress, remaining costs and schedules for La Paz, Pennsylvania, Nicaragua and other development projects, including permits and committed financing.
- Actual LNG procurement costs and availability, performance of the 2022–2030 supply agreement, and exposure to spot-price movements and take-or-pay commitments.
- Customer payment and contract performance, particularly PREPA and Jamaican counterparties, and the outcome of FERC’s San Juan Facility inquiry.
- Debt covenant headroom, future financing needs, the cost of the 2025 notes, and the effect of dividends on liquidity; the company declared a $0.10-per-share Q4 dividend after quarter-end.