There’s a massive amount of supply in the later part of the decade, and so of the things that I am concerned about with respect to our business right now, long term supply of LNG is not anywhere on the list. I just think there’s many, many different ways that that issue can be addressed. In the short term, we’ve gone through a lot of investment and a lot of focus to get our own liquefiers up and running that addresses the short term needs in the ’24, ’25, ’26, 2’7 period, but beyond that, I think there’s more likely to be an abundance of supply than not, and I think frankly the most scarce resource by far in the LNG ecosystem around the world will be downstream terminals, like ourselves. Really to my knowledge, there’s nobody that has the same collection of downstream terminals, that has so much excess capacity already up and operational, that can service all our customers and therefore create a short for all these other long providers to come into.
I think we couldn’t be better positioned, honestly, as a company based on where we are, given the macro landscape as well.
Craig Shere: Right, and last question on FLNG 2, great that you have firm contracting on that, so we have a better sense of cost and delivery. But is all Mexican contracting, regulatory approvals, is everything in place at this point? What is left in terms of hurdles to make this 100% locked in?
Brannen McElmurray: Yes, I think we’re following the same path that we did on FLNG 1, Craig, so you have the CFE as your partner, the president, his cabinet, the successor administration have all expressed strong desire for this contract–this project to move forward quickly. I’ll tell you that everything that we can apply for now has been applied for, and everything is in the path of moving to approval. Again, with the government effectively as your partner here with massive financial incentives themselves for this project to get online – again, we’re using existing infrastructure that they’re paying for and not really getting the benefit of now, plus the profits in the project make this extremely attractive to them, and we don’t expect any challenges going forward.
Wes Edens: Yes, and I want to reiterate again what I said earlier, which is the existing FTA approvals that we have, the existing ability for us to bring volumes to Puerto Rico with our downstream volumes, means that essentially we have a home for all of our own production right now, which is a massive difference versus anybody else who’s got a new project. I mean, obviously we expect that this ban will not be a long term ban, we expect that it will be resolved at some point in time, but of course we can’t predict the future, so we don’t know when it will happen. Happily from our standpoint, we are the only company that doesn’t care about that because we’re actually in a great position as we are right now, because of our downstream and where it’s all located.
Operator: We’ll move to our next caller, Sherif Elmaghrabi with BTIG. Please go ahead, your line is open.
Sherif Elmaghrabi: Hey, good morning. Thanks for taking my questions. First, I guess a couple questions ago, this is kind of asking half of that a different way, but realizing the long term goal of the integrated model to supply your own LNG to your own terminals, is there any reason why the company still couldn’t take advantage of LNG price arbitrage, if they present themselves in the future?
Wes Edens: You know, we don’t really view ourselves as the merchant business. We want to be in the business of full integration, so we integrate ourselves from liquefaction to transport to terminals to power our gas, and so we don’t want to be in the merchant business. We don’t want to have to predict that as part of our future, and I think we very successfully have insulated ourselves from these price swings. Again, I’d point to look at the price decline for TTF or JKM in the second half of the year, look at the results of other companies that were exposed to that, compare them to our results over the same period and you’ll see the benefit of that. We think that with this now focus and delivery of our operating results, our goal is to both be very predictable as a company going forward, and also to be a growing company as we continue to manage the upside of these different terminals and markets around the world.
That clearly is the objective, and I think that we have made great strides in getting that – it’s always a bit of a process, but in the last two quarters, we think our–you know, two in a row in terms of actually doing what we said we were going to do, and so we feel really good about that.
Sherif Elmaghrabi: Thanks Wes. Then I want to get a better idea of these additional opportunities in Brazil. Do you have a sense on the turnaround time on that 8 gigawatt-plus power auction, so how long after holding the auction are winners announced, and do you have a sense how long after that we could see some more gas volumes pulled through the Brazil terminal?
Wes Edens: Yes, I’ll let Andrew go through that. Maybe just spend one minute and talk about how the auction actually works, because I think that’s quite interesting.
Andrew Dete: Yes, sure. Thanks for the question. Generally, those auctions are decided the same day–sorry, not generally, they are decided the same day. They’re very transparent, they’re done on an electronic platform, you can see all the bids that happen. The way that we expect this to happen is consistent with history, which is in the next maybe couple weeks or month, they’ll announce the auctions, there will be a date associated with that – it will be sometime this summer. There will be a month for public consult on the auction rules and different things, they’ll take those into account, and then they’ll set a firm date for the actual auction. Let’s assume for a second that’s June 30, right? On June 30, they’ll run the bid electronic platform.
At the end of the day, you will know if you’ve won or not and at exactly what price. Now to answer your question, when will that actually come online? We think this is actually going to be an interesting auction for that, because there’s probably going to be two subsets of what happens, which would be existing generation and new generation, and we don’t know exactly how that–there might be two auctions or one, it may not matter. But the important thing is the capacity need is so great that we think for the existing generation, which gets a new contract, there is going to be a desire for those to start immediately. The way it will work is there will probably be a three or four-year time frame for the PPAs to actually start, and so for example if your plant has an existing PPA, you can still win this and then kind of contract out.
But for plants that are not contracted today, the auction, the government and the plants are all going to want to start immediately, so that’s exciting and we think it will lead to new volumes in 2024 and early 2025. Then there will be the kind of typical auction for new generation, which would be PPAs starting in 2028, with an ability if you finish those earlier to start earlier, and so the simple cycle configuration of these auctions for capacity in Brazil is interesting, right, because that’s a much more simple construction process, and so we may be able to start sooner than that, but obviously the new generation is going to take construction and will be a little bit later.
Sherif Elmaghrabi: That’s pretty interesting. Thanks everyone.
Wes Edens: Yes, I think the thing, just in terms of talking with Andrew and the team there, that’s so interesting is that when they announce the auctions, there will be a date. On that date, there will be an electronic auction that you’ll be participating in live over the course of the day as you’re making your own bids and you’re seeing how the market adjusts [indiscernible], and by the end of the day, it will be awarded, so it’s an incredibly transparent and buttoned-up process, again. I think the manner in which the Brazilian government has approached this in the last 20 years is very laudable – I mean, it creates a clear path for people to bid, it creates a clear path for the outcomes to be awarded. This nuance that Andrew was talking about, which is will it be with existing power plants that perhaps don’t have gas that are bidding to it, or is it new generation?
It gives a very unique characteristic in that it’s an auction for the future, but the future could be very soon if it’s existing generation, and that’s where there are–again, there are four effective terminals that are in Brazil, two of them are ours, one of them in the capital constrained south, so we think the opportunities for us there are tremendous. You know, I’m not making this the Brazil education on this call – again, we’re going to host investors, rating agencies, counterparties probably sometime in April or May down in Brazil, just to walk through this, which I hope people will take advantage of because we think this as a standalone opportunity is massive, and so I look forward to spending more time on it, along with Andrew.
Operator: Our next question comes from Ryan Levine with Citi. Please go ahead, sir, your line is open.
Ryan Levine: Thanks for taking my questions. Two questions. One, in terms of the ratepayer impact of the potential monetization of the Puerto Rican power plants, how do you see that impacting the end consumer, and to the extent that there is any step-down in PPA rates and ratepayer bills, does that create more impetus for further investment in the location or jurisdiction?
Wes Edens: Go ahead.
Brannen McElmurray: Yes, I can address that. We’ll kind of start with something, I think is an oft-refrained–you know, the people in Puerto Rico pay the most for power anywhere in the U.S. and they have the worst service, so that’s kind of the starting point. If you kind of look at the rate impact of the 350 megawatts that we just put in, even in this short period of time, it’s roughly $0.02 or about 10% off the retail rate, so on a go-forward basis, because what you’re competing with is old technology – you know, the average age of the plant there that burns diesel and HFO is about 35 years, so you’re talking about heat rates that are 12 or 13 versus brand-new technology today, which would be 6, 6.5, so roughly twice as bad.
Once you pair that off with the fact that the delivered cost of distillate fuel there is well in excess of what anybody would really think, because of both where they source it from but also the delivery charge, you have a lot of headroom to compete with. For example, if you look at the price of diesel today, it’s roughly about $22 MMBtu, and so anything less than $22 MMBtu today is a win for the Puerto Rican ratepayer, so there’s a lot of headroom in those kind of numbers.
Ryan Levine: Okay, and then switching gears, you put out a $1.5 billion gross CapEx number. What’s the composition of it and how much is FLNG 1 at this stage? I think in the footnote 21, you mention that there’s excluded interest capitalization, is that a material number?
Chris Guinta: Yes, so of the 1.5–it’s 1.25, it really breaks down to a little–we don’t break it out by project, but total FLNG spend in the year is about $600 million, about $400 million into Brazil to complete various works on the power plant, plus that’s an annualized number, right, so that’s got some money that’s already been spent thus far in Q1. Finally, you’ve got about $200 million that we expect to spend on fuel switching and around Puerto Rico over the next two years, so it’s about half in 2024. As far as capitalized interest, yes, that’s excluded in that number, and it’s less than $100 million.
Wes Edens: Then Ryan, I thought you might ask, so I’ll answer the question. With the $700 million FLNG 2 financing being committed, we’re now fully financed basically as a company, and now that we have announced our results and have updated people on the company, we’re definitely going to evaluate potential refinancing opportunities to address our shorter term maturities and our bond book, so we are actively–we monitor the market conditions and that’s something which now kind of rises to the right level. Every flower has its season, and we needed to get through, kind of have a couple quarters of performance as we have. We’ve basically clarified both performance as well as CapEx and the business updates that are material in both Puerto Rico and Brazil and elsewhere, but we are definitely going to monitor market conditions and evaluate different opportunities that we’ve got to address especially the shorter term maturities of that.
Operator: That was our final question from the audience today. Mr. Pipitone, I’ll turn it back to you, sir, for any additional or closing remarks you may have.
Chance Pipitone: Thank you Lisa, and thank you everyone for joining us today. Again, we remain available, as always, to answer any questions. Please contact the Investor Relations team, and thank you again. Enjoy the rest of your day.
Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.
