NEW FORTRESS ENERGY INC.
Certain information contained in the following discussion and analysis,
including information with respect to our plans, strategy, projections and
expected timeline for our business and related financing, includes
forward-looking statements. Forward-looking statements are estimates based upon
current information and involve a number of risks and uncertainties. Actual
events or results may differ materially from the results anticipated in these
forward-looking statements as a result of a variety of factors.
You should read "Risk Factors" and "Cautionary Statement on Forward-Looking
Statements" elsewhere in this Quarterly Report on Form 10-Q ("Quarterly Report")
and under similar headings in the Annual Report on Form 10-K for the year ended
December 31, 2020 (our "Annual Report") for a discussion of important factors
that could cause actual results to differ materially from the results described
in or implied by the forward-looking statements contained in the following
discussion and analysis.
The following information should be read in conjunction with our unaudited
condensed consolidated financial statements and accompanying notes included
elsewhere in this Quarterly Report. Our financial statements have been prepared
in accordance with generally accepted accounting principles in the United States
of America ("GAAP"). This information is intended to provide investors with an
understanding of our past performance and our current financial condition and is
not necessarily indicative of our future performance. Please refer to "-Factors
Impacting Comparability of Our Financial Results" for further discussion. Unless
otherwise indicated, dollar amounts are presented in thousands.
Unless the context otherwise requires, references to ''Company,'' ''NFE,''
''we,'' ''our,'' ''us'' or similar terms refer to (i) prior to our conversion
from a limited liability company to a corporation, New Fortress Energy LLC and
its subsidiaries and (ii) following the conversion from a limited liability
company to a corporation, New Fortress Energy Inc. and its subsidiaries.
Overview
We are a global integrated gas-to-power infrastructure company that seeks to use natural gas to satisfy the world's large and growing power needs. We deliver targeted energy solutions to customers around the world, thereby reducing their energy costs and diversifying their energy resources, while also reducing pollution and generating compelling margins. Our near-term mission is to provide modern infrastructure solutions to create cleaner, reliable energy while generating a positive economic impact worldwide. Our long-term mission is to become one of the world's leading carbon emission-free independent power providing companies. We discuss this important goal in more detail in the Annual Report, "Items 1 and 2: Business and Properties" under "Toward a Carbon-Free Future". OnApril 15, 2021 , we completed the acquisitions ofHygo Energy Transition Ltd. ("Hygo") and Golar LNG Partners LP ("GMLP"); referred to as the "Hygo Merger" and "GMLP Merger," respectively and, collectively, the "Mergers". NFE paid$580 million in cash and issued 31,372,549 shares of Class A common stock to Hygo's shareholders in connection with the Hygo Merger. NFE paid$3.55 per each common unit of GMLP outstanding and for each of the outstanding membership interest of GMLP's general partner, totaling$251 million . The Company also repaid certain outstanding debt facilities of GMLP in conjunction with closing the GMLP Merger. As a result of the Mergers, we acquired one operating FSRU terminal inSergipe, Brazil (the "Sergipe Facility"), a 50% interest in a 1.5GW power plant inSergipe, Brazil (the "Sergipe Power Plant"), as well as two other FSRU terminals in development inPará, Brazil (the "Barcarena Facility") andSanta Catarina, Brazil (the "Santa Catarina Facility"). We acquired the Nanook, a newbuild FSRU moored and in service at theSergipe Facility. In addition to the Nanook, we also acquired a fleet of six other FSRUs, six LNG carriers and an interest in a floating liquefaction vessel, the Hilli Episeyo (the "Hilli"), which liquefies and stores LNG at sea and transfers it to LNG carriers that berth while offshore, each of which are expected to help support our existing facilities and international project pipeline. The majority of the FSRUs are operating inBrazil ,Kuwait ,Indonesia ,Jamaica andJordan under time charters, and uncontracted vessels are available for short term employment in the spot market. Subsequent to the completion of the Mergers, our chief operating decision maker makes resource allocation decisions and assesses performance on the basis of two operating segments, Terminals and Infrastructure and Ships. Our Terminals and Infrastructure segment includes the entire production and delivery chain from natural gas procurement and liquefaction to logistics, shipping, facilities and conversion or development of natural gas-fired power generation. We currently source LNG from long-term supply agreements with third party suppliers and from our own liquefaction facility inMiami, Florida . Leased vessels as well as the cost to operate our vessels that are utilized in our terminal or logistics operations are included in this segment. 40 -------------------------------------------------------------------------------- Table of Contents The Terminals and Infrastructure segment includes all terminal operations inJamaica ,Puerto Rico andBrazil , including our interest in theSergipe Power Plant. Our Ships segment includes all vessels acquired in the Mergers which are leased to customers under long-term or spot arrangements, including the 25 year charter of Nanook with CELSE. The Company's investment inHilli LLC , owner and operator of the Hilli, is also included in the Ships segment. Over time, we expect to utilize these vessels in our own terminal operations as charter agreements for these vessels expire.
Our Current Operations - Terminals and Infrastructure
Our management team has successfully employed our strategy to secure long-term contracts with significant customers inJamaica andPuerto Rico , including Jamaica Public Service Company Limited ("JPS"), the sole public utility inJamaica ,South Jamaica Power Company Limited ("SJPC"), an affiliate of JPS, Jamalco, a bauxite mining and alumina producer inJamaica , and thePuerto Rico Electric Power Authority ("PREPA"), each of which is described in more detail below. Our assets built to service these significant customers have been designed with capacity to service other customers. We currently procure our LNG either by purchasing from a supplier or by manufacturing it in our Miami Facility. Our long-term goal is to develop the infrastructure necessary to supply our existing and future customers with LNG produced primarily at our own facilities, including Fast LNG and our expanded delivery logistics chain inNorthern Pennsylvania (the "Pennsylvania Facility").
Montego Bay Facility
The Montego Bay Facility serves as our supply hub for the north side ofJamaica , providing natural gas to JPS to fuel the 145MW Bogue Power Plant inMontego Bay, Jamaica . Our Montego Bay Facility commenced commercial operations inOctober 2016 and is capable of processing up to 740,000 gallons of LNG (61,000 MMBtu) per day and features approximately 7,000 cubic meters of onsite storage. The Montego Bay Facility also consists of an ISO loading facility that can transport LNG to numerous on-island industrial users.
Old Harbour Facility
The Old Harbour Facility is an offshore facility consisting of an FSRU that is capable of processing approximately six million gallons of LNG (500,000 MMBtus) per day. The Old Harbour Facility commenced commercial operations inJune 2019 and supplies natural gas to the new 190MW Old Harbour power plant (the "Old Harbour Power Plant") operated by SJPC. The Old Harbour Facility is also supplying natural gas to our dual-fired combined heat and power facility inClarendon ,Jamaica (the "CHP Plant"). The CHP Plant supplies electricity to JPS under a long-term PPA. The CHP Plant also provides steam to Jamalco under a long-term take-or-pay SSA. InMarch 2020 , the CHP Plant commenced commercial operation under both the PPA and the SSA and began supplying power and steam to JPS and Jamalco, respectively. InAugust 2020 , we began to deliver gas to Jamalco to utilize in their gas-fired boilers.
San Juan Facility
InJuly 2020 , we finalized the development of the San Juan Facility. The San Juan Facility is near the San Juan Power Plant and serves as our supply hub for the San Juan Power Plant and other industrial end-user customers inPuerto Rico . We have delivered natural gas used for the commissioning of PREPA's power plant under the Fuel Sale and Purchase Agreement with PREPA sinceApril 2020 . OnJuly 1, 2021 , commission for Units 5 & 6 of the San Juan Power Plant to operate on natural gas was substantially completed under the terms of our agreement with PREPA. See "-Other Matters" for additional information regarding ourSan Juan Facility.
Sergipe Power Plant and Sergipe Facility
As part of the Hygo Merger, we acquired a 50% interest in Centrais Elétricas de
Sergipe Participações S.A. ("CELSEPAR"), which owns Centrais Elétricas de
Sergipe S.A. ("CELSE"), the owner and operator of the Sergipe Power Plant. The
Sergipe Power Plant, a 1.5 GW combined cycle power plant, receives natural gas
from the Sergipe Facility through a dedicated 8-kilometer pipeline. The Sergipe
Power Plant is the largest natural gas-fired thermal power station in South
America and was built to provide electricity on demand throughout the region,
particularly during dry seasons when hydropower is unable to meet the growing
demand for electricity in the region. CELSE has executed multiple PPAs pursuant
to which the Sergipe Power Plant is delivering power to 26 committed offtakers
for a period of 25 years. In any period in which power is not being produced
pursuant to the PPAs, we are able to sell merchant power into the electricity
grid at spot prices, subject to local regulatory approval.
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We also acquired a 75% interest in Centrais Elétricas Barra dos Coqueiros S.A .
("CEBARRA"), which owns rights to expand the Sergipe Power Plant. These rights
include 179 acres of land and regulatory permits for an incremental 1.7GW of
power generation. CEBARRA has obtained all permits and other rights necessary to
participate in future government power auctions.
The Sergipe Facility is capable of processing up to 790,000 MMBtu/d and storing
up to 170,000 cubic meters of LNG. The Sergipe Facility is expected to utilize
approximately 230,000 MMBtu/d (30% of the facility's maximum regasification
capacity) to provide natural gas to the Sergipe Power Plant, at full dispatch.
Miami Facility
Our Miami Facility began operations inApril 2016 . This facility has liquefaction capacity of approximately 100,000 gallons of LNG (8,300 MMBtu) per day and enables us to produce LNG for sales directly to industrial end-users in southernFlorida , includingFlorida East Coast Railway via our train loading facility, and other customers throughout theCaribbean using ISO containers.
Our Current Operations - Ships
Our Ships segment includes six FSRUs and six LNGCs which are leased to customers under long-term or spot arrangements, including a 25-year charter of Nanook with CELSE. As these charter arrangements expire, we expect to use these vessels in our terminal operations and reflect such vessels in our Terminals and Infrastructure segment. The Company's investment inHilli LLC , owner and operator of the Hilli, is also included in the Ships segment.Hilli Corp , a wholly owned subsidiary ofHilli LLC , has a Liquefication Tolling Agreement ("LTA") withPerenco Cameroon S.A. and Société Nationale des Hydrocarbures under which the Hilli provides liquefaction services throughJuly 2026 . Under the LTA,Hilli Corp receives a monthly tolling fee, consisting of a fixed element of hire and incremental tolling fees based on the price of Brent crude oil.
Our Development Projects
La Paz Facility
OnJuly 14, 2021 , we began commercial operations at thePort of Pichilingue inBaja California Sur, Mexico (the "La Paz Facility"). Initially, theLa Paz Facility is expected to supply approximately 270,000 gallons of LNG (22,300 MMBtu) per day under an intercompany GSA for approximately 100 MW of power supplied by gas-fired modular power units that we plan to develop, own and operate, which may be increased to approximately 350,000 gallons (29,000 MMBtu) of LNG per day for up to 135 MW of power. In addition, we recently executed an agreement with CFEnergia for the supply of natural gas to power plants located inPunta Prieta and Coromuel for an estimated 250,000 gallons of LNG (20,700 MMBtu) per day. Puerto Sandino Facility We are also in the process of constructing an LNG regasification facility and power plant inPuerto Sandino ,Nicaragua (the "Puerto Sandino Facility"). InFebruary 2020 , we entered into a 25-year PPA withNicaragua's electricity distribution companies, and we are in the process of constructing an approximately 300 MW natural gas-fired power plant that will consume approximately 700,000 gallons of LNG (57,500 MMBtus) per day.
Suape Facility
OnJanuary 12, 2021 , we acquired CH4 Energia Ltda., an entity that owns key permits and authorizations to develop an LNG terminal and up to 1.37GW of gas-fired power at thePort of Suape inBrazil . OnMarch 11, 2021 , we acquired 100% of the outstanding shares of PecémEnergia S.A. ("Pecém") andEnergetica Camacari Muricy II S.A. ("Muricy"). These companies collectively hold certain 15-year power purchase agreements totaling 288 MW for the development of the thermoelectric power plants in theState of Bahia, Brazil . We will seek to obtain the necessary approvals from ANEEL and other relevant regulatory authorities inBrazil to transfer the site for the power purchase agreements to thePort of Suape and update the technical characteristics in order to develop and plan to construct an initial 288MW gas-fired power plant and LNG import terminal at thePort of Suape to provide LNG and natural gas to major energy consumers within the port complex and across the greater Northeast region ofBrazil (the "Suape Facility").
Barcarena Facility
The Barcarena Facility will consist of an FSRU and associated infrastructure,
including mooring and offshore and onshore pipelines. The Barcarena Facility
will be capable of processing up to 790,000 MMBtu/d and storing up to 170,000
cubic meters of LNG. The Barcarena Facility is expected to utilize approximately
92,000 MMBtu/d (12% of the facility's maximum regasification capacity) to
service the Barcarena Power Plant upon commencement of operations.
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As part of the Mergers, we acquired multiple 25-year PPAs to support the
construction of a 605 MW combined cycle thermal power plant to be located in
Pará, Brazil and to be supplied by the Barcarena Facility (the "Barcarena Power
Plant"). The Barcarena Power Plant will utilize LNG sourced and processed at the
Barcarena Facility for the generation of electricity which will be distributed
to the national electricity grid. The power project is scheduled to deliver
power to nine committed offtakers for 25 years beginning in 2025 in accordance
with the PPA contracts awarded by the Brazilian government in October 2019 .
Santa Catarina Facility
The Santa Catarina Facility will be located on the southern coast ofBrazil and will consist of an FSRU with a processing capacity of approximately 790,000 MMBtu/d and LNG storage capacity of up to 170,000 cubic meters. We are also developing a 31-kilometer, 20-inch pipeline that will connect theSanta Catarina Facility to the existing inlandTransportadora Brasileira Gasoduto Bolivia-Brasil S.A. ("TBG") pipeline via an interconnection point in Garuva. The Santa Catarina Facility and associated pipeline are expected to have a total addressable market of 15 million GPD.
Fast LNG
We are currently developing a modular floating liquefaction facility to provide a low-cost supply of liquefied natural gas for our growing customer base. The "Fast LNG" design pairs advancements in modular, midsize liquefaction technology with jack up rigs or similar floating infrastructure to enable a much lower cost and faster deployment schedule than today's floating liquefaction vessels. A permanently moored FSU will serve as an LNG storage facility alongside the floating liquefaction infrastructure, which can be deployed anywhere there is abundant and stranded natural gas.
Recent Developments
COVID-19 Pandemic
We are closely monitoring the impact of the novel coronavirus ("COVID-19")
pandemic on all aspects of our operations and development projects, including
our marine operations acquired in the Mergers. Customers in our Terminals and
Infrastructure segment primarily operate under long-term contracts, many of
which contain fixed minimum volumes that must be purchased on a "take-or-pay"
basis. We have continued to invoice our customers for fixed minimum volumes even
in cases when our customer's consumption has decreased. We have not changed our
payment terms with these customers, and there has not been deterioration in the
timing or volume of collections.
Many of the vessels acquired in the Mergers operate under long-term contracts
with fixed payments. We are required to have adequate crewing aboard our vessels
to fulfill the obligations under our contracts, and we have implemented safety
measures to ensure that we have healthy qualified officers and crew. We are also
monitoring local or international transport or quarantine restrictions limiting
the ability to transfer crew members off vessels or bring a new crew on board,
and restrictions in availability of supplies needed on board due to disruptions
to third-party suppliers or transportation alternatives.
Based on the essential nature of the services we provide to support power
generation facilities, our operations and development projects have not
currently been significantly impacted by responses to the COVID-19 pandemic. We
remain committed to prioritizing the health and well-being of our employees,
customers, suppliers and other partners. We have implemented policies to screen
employees, contractors, and vendors for COVID-19 symptoms upon entering our
development projects, operations and office facilities. For the three months and
six months ended June 30, 2021 , we have incurred approximately $0.1 million and
$0.5 million , respectively, for safety measures introduced into our operations
and other responses to the COVID-19 pandemic.
We are actively monitoring the spread of the pandemic and the actions that
governments and regulatory agencies are taking to fight the spread. We have not
experienced significant disruptions in development projects, charter or terminal
operations from the COVID-19 pandemic; however, there are important
uncertainties including the scope, severity and duration of the pandemic, the
actions taken to contain the pandemic or mitigate its impact, and the direct and
indirect economic effects of the pandemic and containment measures. We do not
currently expect these factors to have a significant impact on our results of
operations, liquidity or financial position, or our development budgets or
timelines.
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Other Matters
On June 18, 2020 , we received an order from FERC , which asked us to explain why
our San Juan Facility is not subject to FERC's jurisdiction under section 3 of
the NGA. Because we do not believe that the San Juan Facility is jurisdictional,
we provided our reply to FERC on July 20, 2020 and requested that FERC act
expeditiously. On March 19, 2021 FERC issued an order that the San Juan Facility
does fall under FERC jurisdiction. FERC directed us to file an application for
authorization to operate the San Juan Facility within 180 days of the order,
which is September 15, 2021 , but also found that allowing operation of the San
Juan Facility to continue during the pendency of an application is in the public
interest. FERC also concluded that no enforcement action against us is
warranted, presuming we comply with the requirements of the order. Parties to
the proceeding, including the Company, sought rehearing of the March 19, 2021
FERC order, and FERC denied all requests for rehearing in an order issued on
July 15, 2021 . We have filed petitions for review of FERC's March 19 and July 15
orders with the United States Court of the Appeals for the District of Columbia
Circuit . To date, no other party has sought review of FERC's orders. While our
petitions for review are pending, we intend to comply with FERC's directive to
file an application for authorization to operate the San Juan Facility no later
than the September 15, 2021 deadline.
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Results of Operations - Three and Six Months Ended June 30, 2021 compared to
Three and Six Months Ended June 30, 2020
Segment performance is evaluated based on operating margin and the tables below
presents our segment information for the three and six months ended June 30,
2021 and 2020:
Three Months Ended
Terminals and
(in thousands of $) Infrastructure?¹? Ships?²? Total Segment Eliminations?³? Consolidated
Total revenues $ 181,548 $ 95,762 $ 277,310 $ (53,471 ) $ 223,839
Cost of sales 103,451 - 103,451 (2,021 ) 101,430
Vessel operating expenses - 20,175 20,175 (4,775 ) 15,400
Operations and maintenance 23,644 - 23,644 (5,079 ) 18,565
Operating margin $ 54,453 $ 75,587 $ 130,040 $ (41,596 ) $ 88,444 Six Months Ended
Terminals and
(in thousands of $) Infrastructure?¹? Ships?²? Total Segment Eliminations?³? Consolidated
Total revenues $ 327,232 $ 95,762 $ 422,994 $ (53,471 ) $ 369,523
Cost of sales 200,122 - 200,122 (2,021 ) 198,101
Vessel operating expenses - 20,175 20,175 (4,775 ) 15,400
Operations and maintenance 39,895 - 39,895 (5,079 ) 34,816
Operating margin $ 87,215 $ 75,587 $ 162,802 $ (41,596 ) $ 121,206
?¹? Terminals and Infrastructure includes the Company's effective share of
revenues, expenses and operating margin attributable to 50% ownership of
CELSEPAR. The earnings attributable to the investment of $28,447 are reported in
income (loss) from equity method investments on the condensed consolidated
statements of operations.
?²? Ships includes the Company's effective share of revenues, expenses and
operating margin attributable to 50% ownership of the Hilli Common Units. The
earnings attributable to the investment of $10,494 are reported in income (loss)
from equity method investments on the condensed consolidated statements of
operations and comprehensive loss.
?³? Eliminations reverse the inclusion of the effective share of revenues,
expenses and operating margin attributable to 50% ownership of CELSEPAR and
Hilli Common Units in our segment measure.
Terminals and Infrastructure
(in thousands of $) Three Months Ended Six Months Ended
June 30, 2020 June 30, 2020
Total revenues $ 94,566 $ 169,096
Cost of sales 69,899 138,115
Operations and maintenance 9,500 17,983
Operating margin $ 15,167 $ 12,998
Terminals and Infrastructure Segment
Three Months Ended June 30, Six Months Ended June 30,
(in thousands of $) 2021 2020 Change 2021 2020 Change
Total revenue $ 181,548 $ 94,566 $ 86,982 $ 327,232 $ 169,096 $ 158,136
Cost of sales 103,451 69,899 33,552 200,122 138,115 62,007
Operations and
maintenance 23,644 9,500 14,144
39,895 17,983 21,912
Operating margin
Total revenue
Total revenue for the Terminals and Infrastructure Segment increased$86,982 and$158,136 for the three and six months endedJune 30, 2021 as compared to the three months and six months endedJune 30, 2020 , respectively. The increase was primarily driven by increases in revenue from the sale of LNG, natural gas or outputs from our natural gas-fired power generation facilities, increases in development services inPuerto Rico , inclusive of gas used by our customer as part of commissioning their assets, and the inclusion of incremental revenue in our segment measure from CELSEPAR after the completion of the Mergers. 45 -------------------------------------------------------------------------------- Table of Contents Revenue from the sale of LNG, natural gas or outputs from our natural gas-fired power generation facilities increased$26,659 and$54,353 for the three and six months endedJune 30, 2021 , respectively, as compared to the three and six months endedJune 30, 2020 . The increase was primarily driven by increases in volumes sold from the Old Harbour Facility, including volumes utilized in the CHP Plant which commenced commercial operations duringMarch 2020 :
• For the three months ended
volumes sold at the Old Harbour Facility, as compared to
months ended June, 2020, driven by additional volumes consumed at the Old
Harbour Power Plant and Jamalco's boilers, which began consuming gas in August
2020. Volumes delivered to the Old Harbour Power Plant increased by 12.0
million gallons (1.0 TBtu) to 31.3 million gallons (2.6 TBtu) in the three
months ended
months ended
boilers increased by 4.7 million gallons (0.4 TBtu) to 28.7 million gallons
(2.4 TBtu) in the three months ended
(2.0 TBtu) in the three months ended
• For the six months ended
volumes sold at the Old Harbour Facility, as compared to
months ended
Harbour Power Plant, CHP Plant and Jamalco's boilers. Volumes delivered to the
Old Harbour Power Plant increased by 7.4 million gallons (0.6 TBtu) to 58.9
million gallons (4.9 TBtu) in the six months ended
million gallons (4.3 TBtu) in the six months ended
delivered to the CHP Plant and Jamalco's boilers increased by 20.4 million
gallons (1.7 TBtu) to 54.2 million gallons (4.5 TBtu) in the six months ended
30, 2020.
• Revenue from the delivery of power and steam, which began during
under our contracts with JPS and Jamalco was
and six months ended
Revenue was also impacted by operations at our Montego Bay Facility.
• Sales at the Montego Bay Facility increased by
three months ended
2021. The increase in sales at the Montego Bay Facility was primarily due to an
increase in sales to industrial end-user customers, offset by a slight decrease
in consumption by the Bogue Power Plant. Volumes delivered at the
Facility remained relatively consistent for the three months ended
2021 as compared to the three months ended
million gallons (0.2 TBtu) from 23.1 million gallons (1.9 TBtu) during the
three months ended
three months ended
• Sales at the Montego Bay Facility increased by
months ended
The increase in sales at the Montego Bay Facility was primarily due to an
increase in sales to industrial end-user customers, offset by a slight decrease
in consumption by the Bogue Power Plant. Volumes delivered at the
Facility remained relatively consistent for the six months ended
as compared to the six months ended
gallons (0.2 TBtu) from 46.6 million gallons (3.9 TBtu) during the six months
ended
endedJune 30, 2021 . We also recognize revenue from development services, which is recognized from the construction, installation and commissioning of equipment to transform customers' facilities to operate utilizing natural gas or to allow customers to receive power or other outputs from our power generation facilities, and such services are included within certain long-term contracts to supply these customers with natural gas or outputs from our natural gas-fired facilities.
• Revenue increased by
2020 to
due to an increase in revenue for development services in
three months ended
testing and commissioning their assets. Development services revenue recognized
in the three months ended
million gallons (3.7 TBtu) of natural gas as part of commissioning their
assets. The increases were also due to an increase in development services
revenue of
the San Juan Power Plant.
• Revenue increased by
2020 to
due to an increase in revenue for development services in
six months ended
and commissioning their assets. Development services revenue recognized in the
six months ended
million gallons (7.7 TBtu) of natural gas as part of commissioning their
assets. The increases were also due to an increase in development services
revenue of
the San Juan Power Plant.
46-------------------------------------------------------------------------------- Table of Contents Subsequent to the acquisition of the Sergipe Facility as part of the Mergers, our share of revenue from our investment in CELSEPAR was$31,769 , which was primarily comprised of fixed capacity payments received under our PPAs. Our proportionate share of revenue from the Sergipe Facility is included in this discussion as such revenue is included in our segment measure; in our consolidated statement of operations and comprehensive loss, we report the results from our investment in CELSEPAR as Income (loss) from equity method investments.
Cost of sales
Cost of sales includes the procurement of feedgas or LNG, as well as shipping and logistics costs to deliver LNG or natural gas to our facilities, power generation facilities or to our customers. Our LNG and natural gas supply are purchased from third parties or converted in our Miami Facility. Costs to convert natural gas to LNG, including labor, depreciation and other direct costs to operate our Miami Facility are also included in Cost of sales. Cost of sales increased$33,552 and$62,007 for the three and six months endedJune 30, 2021 , respectively, as compared to the three and six months endedJune 30, 2020 , respectively.
• Cost of LNG purchased from third parties for sale to our customers or delivered
for commissioning of our customer's assets in
the three months ended
months ended
increase in volumes delivered compared to the three months ended
partially offset by the decrease in LNG cost. The weighted-average cost of LNG
purchased from third parties decreased from
for the three months ended
for the three months ended
• Cost of LNG purchased from third parties for sale to our customers or delivered
for commissioning of our customer's assets in
the six months ended
ended
in volumes delivered compared to the six months ended
offset by the decrease in LNG cost. The weighted-average cost of LNG purchased
from third parties decreased from
six months ended
six months ended
The weighted-average cost of our inventory balance as of
Charter costs increased Cost of sales by$3,821 and$6,062 for the three and six months endedJune 30, 2021 , respectively. The increase was attributable to an additional vessel in our fleet associated with our San Juan Facility after our assets were placed in service in the third quarter of 2020, as well as an additional vessel lease that we assumed as part of the Mergers. Additionally, as a result of the Mergers, we have effectively settled our charter agreement for the Freeze, one of the acquired vessels, and as such, the increase in charter costs has been partially offset by lower costs associated with the Freeze.
Operations and maintenance
Operations and maintenance includes costs of operating our Facilities, exclusive of costs to convert that are reflected in Cost of sales. Operations and maintenance increased$14,144 and$21,912 for the three and six months endedJune 30, 2021 , respectively, as compared to the three and six months endedJune 30, 2020 .
• Subsequent to acquisition of the Sergipe Facility as part of the Mergers, our
share of Operations and maintenance from our investment in CELSEPAR was
which was primarily comprised of costs related to the operation and services
agreement for the Nanook, insurance costs and costs for connecting to the
transmission system.
• The increase for the three months ended
months ended
during the three months ended
had just commenced commercial operations in the first quarter of 2020.
Operations and maintenance increased by the costs of operating the
Facility and CHP Plant of
logistics costs, as well as incremental costs of vessels used in our terminal
operations subsequent to the Mergers; these additional costs were
the three months endedJune 30, 2021 . 47
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• The increase for the six months ended
months ended
during the six months ended
commenced commercial operations during the six months ended
Operations and maintenance increased by the costs of operating the
Facility and CHP Plant of
logistics costs, as well as incremental costs of vessels used in our terminal
operations subsequent to the Mergers; these additional costs were
the six months ended
Ships Segment
Three Months Ended Six Months Ended
(in thousands of $) June 30, 2021 June 30, 2021
Total revenue $ 95,762 $ 95,762
Vessel operating expenses 20,175 20,175
Operating margin $ 75,587 $ 75,587
Prior to the completion of the Mergers, we reported our results of operations in
a single segment; all the assets and operations that comprise the Ships segment
were acquired in the Mergers, and as such, there are no results of operations
prior to the completion of the Mergers during the second quarter of 2021.
Revenue in the Ships segment is comprised of operating lease revenue under time
charters, fees for repositioning vessels as well as the reimbursement of certain
vessel operating costs such as drydocking costs in relation to these leasing
arrangements. We have also recognized revenue related to the interest portion of
lease payments and the operating and service agreements in connection with the
sales-type lease of the Nanook.
Subsequent to the completion of the Mergers, five of the FSRUs and one LNGCs
were on hire under long-term charter agreements for the full period. Two LNGCs
were operating in the spot market for a portion of the period subsequent to the
completion of the Mergers. The Spirit and the Mazo continue to be in cold
lay-up, and no vessel charter revenue was generated from these vessels.
Two of the vessels acquired in the Mergers, the Celsius and the Penguin,
currently participate in an LNG carrier pooling arrangement, which we refer to
as the Cool Pool . Under this arrangement, the pool manager markets participating
vessels in the LNG shipping spot market, and the vessel owner continues to be
fully responsible for the manning and technical management of their respective
vessels. Revenue for charters of our vessels in the Cool Pool is presented on a
gross basis in revenue, and the Company's allocation of its share of the net
revenues earned from the other pool participants' vessels, which may be either
income or expense depending on the results of all pool participants, is
reflected on a net basis within Vessel operating expenses.
Revenue recognized in the Ships segment included $9,681 of interest income for
the Nanook sales-type lease and $1,165 of revenue for operating services
provided to the charterer of the Nanook, CELSE, for the period subsequent to the
completion of the Mergers.
Our segment measure includes our proportionate share of the results of
operations of the Hilli. Our share of revenue from our investment in Hilli LLC
was $21,747 which was primarily comprised of fees received under the long-term
tolling arrangement. The Hilli maintained 100% commercial uptime during the
period subsequent to the Mergers.
Vessel operating expenses
Vessel operating expenses include direct costs associated with operating a vessel, include crewing, repairs and maintenance, insurance, stores, lube oils, communication expenses and management fees. We also recognize voyage expenses within Vessel operating expenses, which principally consist of fuel consumed before or after the term of time charter or when the vessel is off hire. Under time charters, the majority of voyage expenses are paid by customers. To the extent that these costs are a fixed amount specified in the charter, which is not dependent upon redelivery location, the estimated voyage expenses are recognized over the term of the time charter. During the period after the completion of the Mergers, we recognized$20,175 in Vessel operating expenses, representing two and a half months of operations of each of the acquired vessels. 48 -------------------------------------------------------------------------------- Table of Contents Other operating results Three Months Ended June 30, Six Months Ended June 30, (in thousands of $) 2021 2020 Change 2021 2020
Change
Selling, general and administrative $
44,536
29,152 - 29,152 40,716 - 40,716
Contract termination charges and loss on mitigation sales - 123,906 (123,906 ) - 124,114 (124,114 ) Depreciation and amortization 26,997 7,620 19,377 36,886 12,874 24,012 Total operating expenses 236,080 242,771 (6,691 ) 404,071 353,302 50,769 Operating loss (12,241 ) (148,205 ) 135,964 (34,548 ) (184,206 ) 149,658 Interest expense 31,482 17,198 14,284 50,162 31,088 19,074 Other (income) expense, net
(7,457 ) 999 (8,456 ) (8,058 ) 1,610 (9,668 ) Loss on extinguishment of debt, net
- - - - 9,557 (9,557 )
Net loss before income from equity method investments and income taxes (36,266 ) (166,402 ) 130,136 (76,652 ) (226,461 ) 149,809
Income from equity method investments 38,941 - 38,941 38,941 - 38,941
Tax provision 4,409 117 4,292 3,532 113 3,419
Net loss $ (1,734 ) $ (166,519 ) $ 164,785 $ (41,243 ) $ (226,574 ) $ 185,331 Selling, general and administrative
Selling, general and administrative includes compensation expenses for our corporate employees, employee travel costs, insurance, professional fees for our advisors and costs associated with development activities for projects that are in initial stages and development is not yet probable. Selling, general and administrative increased$12,690 for the three months endedJune 30, 2021 , as compared to the three months endedJune 30, 2020 . The increase was primarily attributable to$6,955 of higher payroll costs associated with increased headcount for the three months endedJune 30, 2021 . Contributing to the increase was higher lease expense, insurance and IT and other costs attributable to our expanded operations of$5,746 . Selling, general and administrative increased$17,936 for the six months endedJune 30, 2021 , as compared to the six months endedJune 30, 2020 . The increase was primarily attributable to$10,893 of higher payroll costs associated with increased headcount for the six months endedJune 30, 2021 . Contributing to the increase was higher lease expense, insurance and IT and other costs attributable to our expanded operations of$7,536 .
Transaction and integration costs
Transaction and integration costs were$29,152 and$40,716 for the three and six months endedJune 30, 2021 , respectively. As part of arranging financing for the Mergers, we incurred$15,000 in bridge financing commitment fees. We issued the 2026 Notes to pay for a portion of the consideration for the Mergers and did not utilize the commitments under the bridge financing, and as such, the fees were expensed with the termination of the bridge financing commitment letter. We also incurred$3,978 of costs related to the settlement of a contractual indemnification obligation under a pre-existing lease arrangement prior to the GMLP Merger. The remaining transaction and integration costs of$10,174 and$21,738 , for the three and six months endedJune 30, 2021 andJune 30, 2020 , respectively, were incurred in connection with the Mergers, which consisted primarily of financial advisory, legal, accounting and consulting costs. We did not have such transactions during the three and six months endedJune 30, 2020 .
Contract termination charges and loss on mitigation sales
Loss on mitigation sales for the three and six months endedJune 30, 2020 was$123,906 and$124,114 , respectively. InJune 2020 , we executed an agreement to terminate our obligation to purchase LNG from our supplier for the remainder of 2020 in exchange for a payment of$105,000 , and we recognized this cancellation charge during the three months endedJune 30, 2020 . We terminated our obligation in the second quarter of 2020 to both take advantage of the low pricing in the open market and to align future deliveries of LNG with our expected needs. Additionally, in the second quarter of 2020, we experienced lower than expected consumption by some of our customers, primarily as a result of unplanned maintenance at one of our customer's facilities inJamaica . As a result, we were unable to utilize a firm cargo purchased under our LNG supply agreement, incurring a loss of$18,906 on the sale of this cargo that was recognized during the second quarter of 2020. We did not have such transactions during the three and six months endedJune 30, 2021 .
Depreciation and amortization
Depreciation and amortization increased$19,377 and$24,012 for the three and six months endedJune 30, 2021 , respectively, as compared to the three and six months endedJune 30, 2020 . The increase was primarily due to the following:
• Subsequent to the completion of the Mergers, our results of operations include
depreciation expense primarily for the vessels acquired. We recognized
of incremental depreciation expense for the acquired vessels during the three
and six months ended
year;
49--------------------------------------------------------------------------------
Table of Contents • Amortization of the value recorded for favorable and unfavorable contracts
acquired in the Mergers of
• Increase in depreciation of
went into service in
2021, respectively; and
• Increase in depreciation of
Interest expense
Interest expense increased by$14,284 and$19,074 for the three and six months endedJune 30, 2021 , respectively, as compared to the three and six months endedJune 30, 2020 . The increase was primarily due to an increase in total principal outstanding due to the issuance of the 2025 Notes inSeptember 2020 , the 2026 Notes inApril 2021 and draws on the Revolving Facility in the second quarter of 2021 (all defined below); principal outstanding on these outstanding facilities was$2,902,500 as ofJune 30, 2021 as compared to total outstanding debt of$980,000 as ofJune 30, 2020 . In conjunction with the Mergers, we assumed outstanding debentures issued by a subsidiary of Hygo and the outstanding debt of variable interest entities ("VIEs") that are now consolidated in our financial statements, totaling$679,558 as of the acquisition date. Although we have no control over the funding arrangements of these entities, we are the primary beneficiary of these VIEs and therefore these loan facilities are presented as part of the condensed consolidated financial statements. We recognized a reduction to interest expense attributable to assumed debt of$6,635 for the period subsequent to the completion of Mergers. Upon assumption of the debt held by VIEs, we recognized the liabilities assumed at fair value, and the amortization of the premium of$9,707 has been recognized as a reduction to interest expense incurred of$3,072 .
Other (income) expense, net
Other (income) expense, net increased by$8,456 and$9,668 for the three and six months endedJune 30, 2021 , respectively, as compared to the three and six months endedJune 30, 2020 . The increases in income were primarily as a result of changes in fair value in the interest rate swap and cross currency interest rate swap assumed in the Mergers for both the three and six months endedJune 30, 2021 . During both the three months and six months endedJune 30, 2021 , we additionally recognized remeasurement gains resulting in increases to other income. We also recognized increased income from the change in fair value of the derivative liability and equity agreement associated with payments due to sellers in asset acquisitions. Increases to income were offset by a decrease to interest income.
Loss on extinguishment of debt, net
Loss on extinguishment of debt for the three and six months endedJune 30, 2020 was$9,557 as a result of the extinguishment of the term loan facility inJanuary 2020 . We did not have such transactions during the three and six months endedJune 30, 2021 . Tax provision We recognized a tax provision for the three and six months endedJune 30, 2021 of$4,409 and$3,532 , respectively, compared to tax provision of$117 and$113 for the three and six months endedJune 30, 2020 , respectively. The increases to the tax provision and effective tax rate for both the three and six months endedJune 30, 2021 was primarily driven by an increase in pre-tax income in certain profitable non-U.S. operations and the inclusion of GMLP and Hygo into our expected pre-tax results of operations for the year endedDecember 31, 2021 . For the six months endedJune 30, 2021 , these increases in tax expense were partially offset by the release of a valuation allowance in a foreign jurisdiction resulting in a discrete benefit of$2,778 .
Income from equity method investments
During the period after the completion of the Mergers, we recognized income from our investments in Hilli and CELSEPAR of$38,941 . Our proportionate share of the earnings of Hilli and CELSEPAR of$10,595 and$34,120 , respectively, were offset by amortization of basis differences through our equity earnings of$5,774 . Our share of earnings from CELSEPAR was significantly impacted by foreign currency remeasurment gains recognized during the period after the Mergers of$25,776 , primarily the result of the remeasurement of the Nanook finance lease obligation. 50 -------------------------------------------------------------------------------- Table of Contents Factors Impacting Comparability of Our Financial Results
Our historical results of operations and cash flows are not indicative of results of operations and cash flows to be expected in the future, principally for the following reasons:
• Our historical financial results include the results of operations of Hygo and
GMLP only since the completion of the Mergers in
all integration and transaction costs expected to be incurred associated with
these acquisitions. Upon completion of the Mergers, we acquired a fleet of
seven FSRUs, six LNG carriers and an interest in a floating liquefaction
vessel. We also acquired the Sergipe Facility, a 50% interest in the
Power Plant, as well as the Barcarena Facility and the Santa Catarina Facility
that are currently in development. The results of operations of Hygo and GMLP
began to be included in our financial statements upon the closing of the
acquisitions on
include transaction costs associated with these acquisitions as well as costs
incurred to integrate the operations of Hygo and GMLP into our business, which
may be significant.
• Our historical financial results do not include significant projects that have
recently been completed or are near completion. Our results of operations for
the three and six months ended
Old Harbour Facility, San Juan Facility, certain industrial end-users and our
Miami Facility. We are finalizing development of our La Paz Facility and our
Puerto Sandino Facility, and our current results do not include revenue and
operating results from these projects. Our current results also exclude other
developments, including the Suape Facility, the Barcarena Facility, the Santa
Catarina Facility and the Ireland Facility.
• Our historical financial results do not reflect new LNG supply agreements that
will lower the cost of our LNG supply through 2030. We currently purchase the
majority of our supply of LNG from third parties, sourcing approximately 97% of
our LNG volumes from third parties for the three and six months ended
2021, respectively, a significant portion of which is under an LNG supply
agreement signed in 2018. During 2020 and 2021, we also entered into LNG supply
agreements for the purchase of approximately 601 TBtu of LNG at a price indexed
to
pricing in our previous long-term supply agreement. We have now secured supply
for LNG volumes equal to approximately 100% of our expected needs for our
Montego Bay Facility, Old Harbour Facility, San Juan Facility, La Paz Facility
and Puerto Sandino Facility for the next six years.
We also anticipate that the deployment of Fast LNG floating liquefaction facilities will significantly lower the cost of our LNG supply and reduce our dependence on third party suppliers.
Liquidity and Capital Resources
We believe we will have sufficient liquidity from proceeds from recent borrowings, access to additional capital sources and cash flow from operations to fund our capital expenditures and working capital needs for the next 12 months. We expect to fund our current operations and continued development of additional facilities through cash on hand, borrowings under our Revolving Facility and cash generated from operations. We may also elect to generate additional liquidity through future debt or equity issuances to fund developments and transactions. We have historically funded our developments through proceeds from our IPO and debt and equity financing as follows:
• In
prior term loan facility in full.
• In
outstanding debt. No principal payments are due on the 2025 Notes until maturity in 2025.
• In
this issuance, these additional notes are included in the definition of 2025
Notes herein).
• In
received proceeds of
OnApril 12, 2021 , we issued$1.5 billion of 2026 Notes. The 2026 Notes bear interest at 6.50% per annum and were issued at an issue price equal to 100% of principal. No principal payments are due on the 2026 Notes until maturity in 2026. The Company used the net proceeds from this offering to fund the cash consideration for the GMLP Merger and pay related fees and expenses. OnApril 15, 2021 , we entered into the$200,000 Revolving Facility that has a term of approximately five years and bears interest based on the three-month LIBOR rate plus certain margins. 51
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Table of Contents We have assumed total committed expenditures for all completed and existing projects to be approximately$1,428 million , with approximately$1,059 million having already been spent throughJune 30, 2021 . This estimate represents the committed expenditures necessary to complete the La Paz Facility,Puerto Sandino Facility, the Suape Facility, the Barcarena Facility and theSanta Catarina Facility, as well committed expenditures to serve new industrial end-users. We expect to be able to fund all such committed projects with a combination of cash on hand, cash flows from operations, proceeds from the sale and lease back of the CHP Plant and borrowings under our Revolving Facility. We may also enter into other financing arrangements to generate proceeds to fund our developments. ThroughJune 30, 2021 , we have spent approximately$128 million to develop the Pennsylvania Facility. Approximately$22 million of construction and development costs have been expensed as we have not issued a final notice to proceed to our engineering, procurement and construction contractors. Cost for land, as well as engineering and equipment that could be deployed to other facilities and associated financing costs of approximately$106 million , has been capitalized, and to date, we have repurposed approximately$17 million of engineering and equipment to our Fast LNG project.
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