New Fortress Energy LLC (now New Fortress Energy Inc.) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Financial amounts below are U.S. dollars in millions unless stated otherwise. The filing was made by New Fortress Energy LLC; the company announced a conversion to a Delaware corporation expected to take effect August 7, 2020.
Business context
NFE is an integrated gas-to-power infrastructure company operating LNG, natural gas, terminal and power-generation assets, primarily in the United States and Jamaica, with development projects in other markets. Its strategy relies on long-term customer contracts, many with take-or-pay provisions, and expansion of its supply and infrastructure network. The Old Harbour Terminal and Clarendon combined heat and power plant contributed to the period’s increased activity; the San Juan Facility was still being commissioned.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $94.6 | $39.8 | $169.1 | $69.7 |
| Operating loss | $(148.2) | $(44.0) | $(184.2) | $(103.3) |
| Net loss | $(166.5) | $(51.2) | $(226.6) | $(111.5) |
| Net loss attributable to shareholders | $(137.4) | $(6.2) | $(145.7) | $(19.7) |
| Basic and diluted loss per share | $(2.40) | $(0.28) | $(3.49) | $(1.09) |
- Revenue and operating contribution: Q2 operating revenue was $76.2 million, up from $31.7 million; other revenue was $18.4 million, versus $8.0 million. Revenue less cost of sales was $24.7 million, or about 26% of revenue, compared with negative $4.3 million in Q2 2019. This is a simple revenue-minus-cost-of-sales measure, not a reported operating margin.
- Cash flow: For the six months, operating cash use was $80.3 million and investing cash use was $95.3 million, including $95.4 million of capital expenditures. Financing provided $306.0 million. Cash, cash equivalents and restricted cash ended the period at $223.4 million; unrestricted cash was $167.3 million.
- Balance sheet and liquidity: June 30 total assets were $1,421.5 million and total liabilities were $1,271.4 million. Current assets of $345.2 million exceeded current liabilities of $249.7 million by $95.5 million. Restricted cash totaled $56.1 million and was not all freely available.
- Debt and leases: Debt carrying value was $950.2 million, including $773.9 million under the Credit Agreement. Lease liabilities were $84.0 million. The Credit Agreement matures in January 2023, with a full principal balance due at maturity; its interest margin steps up annually. Senior secured and unsecured bonds carry fixed rates of 8.25% and 11.00%, respectively.
Material changes versus the prior comparable period
- Revenue growth reflected higher volumes at Old Harbour, the CHP plant’s commercial operations beginning March 2020, and Puerto Rico development and commissioning services. Power and steam sales added $6.9 million of Q2 operating revenue.
- Cost of sales rose with higher delivered volumes, although third-party LNG costs for Jamaican operations fell to an average $0.68 per gallon in Q2 2020 from $0.83 a year earlier.
- Operating loss widened substantially, principally because NFE recorded $123.9 million of contract termination and mitigation-sale costs: a $105.0 million LNG supply cancellation charge and an $18.9 million loss on a cargo mitigation sale.
- Interest expense increased to $17.2 million in Q2 from $6.2 million, reflecting higher debt balances. First-half results also included a $9.6 million loss on extinguishment of the prior Term Loan Facility.
- On June 10, NFE exchanged 144.3 million Class B shares and corresponding NFI units for Class A shares. All NFI units became owned by NFE, eliminating the former controlling non-controlling interest. This changed the allocation of losses to shareholders and makes reported per-share and attributable-loss comparisons less directly comparable.
Outlook, management commentary and risks
- Management said it believed available liquidity, recent borrowings and operating cash flows would be sufficient for capital expenditures and working capital needs over the next 12 months. The company estimated total expenditures of about $855 million for completed and existing projects, with approximately $724 million spent through June 30. It expected to fund committed projects using cash and existing debt proceeds.
- NFE terminated LNG purchases from a supplier for the remainder of 2020 for a $105.0 million cancellation fee, payable in Q3, and intended to buy remaining 2020 requirements in the open market at lower prices. It had 12 cargoes remaining under that supplier contract for 2021 and a separate agreement for 27.5 TBtu annually indexed to Henry Hub from 2022 through 2030.
- Management expected the San Juan Facility to be fully commissioned in Q3 2020. No specific earnings or revenue guidance was provided in the filing.
- Management reported no significant COVID-19 disruption to operations, collections or project timelines through June 30, and approximately $0.5 million of pandemic-related safety costs. It cautioned that the pandemic’s duration and economic effects remained uncertain.
- On June 18, FERC requested an explanation of why the San Juan Facility was not subject to its jurisdiction under Section 3 of the Natural Gas Act. NFE said it did not believe the facility was jurisdictional, had replied on July 20, and could not predict FERC’s response or the outcome.
- Key risks include concentrated customers and geographic exposure, project completion delays and cost overruns, LNG price and supply volatility, substantial debt and refinancing needs, interest-rate exposure, and permitting or regulatory uncertainty. NFE disclosed no current material legal proceedings and no off-balance-sheet arrangements with a material effect.
Most important facts for investors to verify
- Whether lower spot LNG procurement after the $105 million cancellation charge produces lasting savings, and how the 2021 cargo commitments and 2022–2030 supply agreement affect delivered costs.
- Whether San Juan commissioning and other projects meet stated schedules and budgets, and whether FERC asserts jurisdiction or imposes requirements.
- Whether customer demand, collections and take-or-pay protections remain robust, particularly for Jamaica and PREPA in Puerto Rico.
- Liquidity available after the Q3 cancellation-fee payment, project spending and debt service; also review the Credit Agreement’s rising interest margin and 2023 maturity.
- How the June exchange and announced corporate conversion affect reported share counts, loss attribution, governance and the anticipated benefits for liquidity and capital-market access.