New Fortress Energy LLC — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018. The filing is for New Fortress Energy LLC, a newly public holding company whose operating business is conducted through its subsidiary. It provides LNG and natural-gas supply and logistics services, with operations in the United States and Jamaica. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 or comparison |
|---|---|---|
| Total revenue | $30.0 | $25.7; up 16.5% |
| Operating loss | $(59.3) | $(9.5) |
| Net loss | $(60.3) | $(10.9) |
| Net loss attributable to stockholders | $(13.6) | $(10.9) |
| Basic and diluted loss per Class A share | $(0.96) | Not provided for the comparable period |
| Net cash used in operating activities | $(31.0) | $(18.0) |
| Capital expenditures | $136.3 | $41.2 |
| Cash and cash equivalents at quarter end | $359.5 | $78.3 at December 31, 2018 |
| Restricted cash at quarter end | $57.6 | $22.6 at December 31, 2018 |
| Term loan principal outstanding | $498.8 | $280.0 initial balance before the March draw |
- Revenue comprised $26.1 million of operating revenue and $3.8 million of other revenue. Cost of sales was $33.3 million, exceeding total revenue by $3.4 million; the filing attributes higher costs to increased gas costs, delivered volumes and vessel charter expense.
- Gross margin, calculated as total revenue less cost of sales, was approximately negative 11.3%, versus positive 19.2% in Q1 2018. Operating margin was approximately negative 198%.
- Selling, general and administrative expense rose to $49.7 million from $11.9 million. This included $19.0 million of IPO-related restricted-stock-unit compensation and $4.8 million of financing-activity costs; higher professional fees, development activity and headcount also contributed.
- Financing activities provided $483.2 million, including IPO proceeds and $220.0 million of additional term-loan borrowings. Investing activities used $136.0 million. Cash, cash equivalents and restricted cash together increased by $316.1 million.
- Total current liabilities were $594.7 million against current assets of $431.5 million. The reported term-loan carrying amount was $488.3 million; the facility’s $500.0 million principal balance was reduced by deferred financing costs. The loan matures December 31, 2019, with two optional six-month extensions subject to fees and higher spreads.
Material changes versus the prior comparable period
- Revenue increased $4.2 million, mainly from three new small-scale customers, higher consumption by an existing customer and increased deliveries at the Montego Bay Terminal. Jamaica delivered volume rose 16%, to 26.5 million gallons.
- Operating loss widened by $49.9 million, reflecting the cost-of-sales increase and substantially higher SG&A, including IPO-related compensation and financing costs.
- Operating cash use increased $13.1 million, while capital expenditures rose $95.1 million. Management cited continued business expansion and construction activity.
- The February IPO raised approximately $257 million net; the underwriters’ March option exercise added approximately $11 million net. The transaction reorganized the business and introduced non-controlling interests, so the total consolidated net loss and the loss attributable to Class A shareholders differ materially.
Outlook, management commentary and risks
- Management stated it believed available liquidity, operating cash flow and access to capital would fund capital expenditures and working-capital needs for the next 12 months. It also said executing the strategy and expanding into new markets would require significant additional capital. This is not a guarantee of funding availability.
- Management estimated total expenditures of approximately $786 million for specified completed and existing projects, with approximately $450 million spent through March 31, 2019. The company said the Old Harbour power plant was expected to begin commercial operations in Q2 2019; construction, testing and commissioning remained risks.
- The company drew the remaining $220 million available under its term facility in March. It was in covenant compliance at quarter-end, but the large maturity due at year-end and the need to refinance, extend or repay the loan are important liquidity considerations. Management expected approximately $30 million of 2019 interest payments.
- Supply and commodity exposure are significant: 95% of LNG volumes in Q1 2019 came from third parties, and the company reported no current commodity-price hedges. Customer pricing generally references Henry Hub plus a contractual spread. A 1% interest-rate change on the fully drawn facility would change annual interest expense by approximately $5 million.
- Key risks include construction delays and cost overruns; permitting and commissioning; adequate LNG supply and shipping capacity; reliance on a limited number of customers, particularly in Jamaica; counterparty credit risk; and the need for additional financing. PREPA, a potential customer, is in bankruptcy proceedings, and its ability to pay depends in part on external funding. The company also cited political, regulatory, weather, environmental and foreign-exchange risks in its operating and planned markets.
- Unusual items and contingencies: the company recorded a $19.0 million share-based compensation expense; recognized $2.6 million of net other income, including fair-value gains and an equity-investment gain; and recorded a full valuation allowance on specified deferred tax assets. A Florida property-tax rebate remained subject to a state appeal; the company said any refund would be recognized when received. No material legal proceedings were reported.
- The filing gives no specific earnings or revenue guidance. Management’s project, liquidity and timing statements are forward-looking and subject to the stated risks. The company reported disclosure controls were effective at March 31, 2019; it also disclosed a significant deficiency in internal controls identified in preparing its 2017 financial statements and ongoing remediation efforts.
Most important facts for investors to verify
- Progress, cost to complete, permits and commissioning status for Old Harbour, the CHP Plant, San Juan, La Paz and the Pennsylvania facility, including whether expected operating dates are achieved.
- How the company will address the $498.8 million term-loan principal due December 31, 2019, including extension terms, refinancing availability, covenants and related interest cost.
- Whether operating cash generation and committed financing can support the stated project spending and working-capital requirements; distinguish unrestricted cash from restricted cash.
- Changes in LNG sourcing costs, third-party supply dependence, charter costs and customer-level margins, as well as progress toward in-house liquefaction and any future hedging.
- Customer concentration and counterparties’ ability to perform, particularly Jamaican customers and PREPA, and the status of relevant contracts and projects.
- The effect of IPO-related compensation and other public-company costs on recurring SG&A, and the potential dilution from outstanding RSUs and Class B-related conversion rights.