Aug 8, 2021
Operator
Good day, and thank you for standing by. Welcome to the New Fortress Energy Second Quarter 2021 Earnings Call.
At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session.
[Operator Instructions]. Please be advised that today's conference is being recorded.
[Operator Instructions]. I would now like to hand the conference over to your speaker today Josh Kane.
Please go ahead.
Joshua Kane
Thank you. I would like to welcome you to the New Fortress Energy Second Quarter 2021 Earnings Call.
Joining me here today are Wes Edens, our CEO and Chairman of the Board; Chris Guinta, our Chief Financial Officer; and Andrew Dete, Managing Director, leading our Brazil efforts. Throughout the call, we are going to reference the earnings supplement that was posted to the New Energy website, New Fortress Energy website.
If you've not already done so, I'd suggest that you download it now. In addition, we'll be discussing some non-GAAP financial measures during the call today.
The reconciliations of those measures to the most directly comparable GAAP measures can be found in the earnings supplement. Before I turn the call over to Wes, I would like to point out that certain statements made today will be forward-looking statements including regarding future earnings.
These statements, by their nature, are uncertain and may differ materially from actual results. We encourage you to review the disclaimers in our press release and investor presentation regarding non-GAAP financial measures and forward-looking statements and review the risk factors contained in our quarterly report filed with the SEC.
Now I'd like to turn the call over to Wes.
Wesley R. Edens
Great. Thanks very much, Josh and welcome everyone.
As always, we'll refer to the investor presentation, which we posted to the website, as Josh said. But before we get into that, we will make just a couple of thoughts.
It's been an extraordinary quarter for us and a remarkable six months thus far this year. Our company is in the energy transition business.
No surprise, the world needs to decarbonize and do so quickly and our business is to do so, while addressing both energy poverty and energy inequality while also making significant returns for shareholders as we do so. My goal is to be the world's leading company in the energy transition space, and we're making pretty good progress on it thus far this year.
What we have today, just to level set, is the constellation of terminals and operations in countries around the world. Jamaica, Puerto Rico, Mexico, Nicaragua, Brazil, Ireland, Sri Lanka.
It's a geography test that spans the world that has established all these assets and terminals. And now that we've made the investments and done much of the hard work, I expect that each of these markets will show incremental and substantial organic growth from this point forward.
We should expect to see, one, more power plants switching to gas in places like Puerto Rico and Mexico; two, new power plants being built in places like Brazil; three, soon, you'll see bunkering as a -- using LNG as a marine fuel in places like Jamaica as a hub. We've already paid for the operations, we've already paid for the infrastructure, we have a massive competitive advantage that is both money and time, and I believe we're going to show now tremendous organic growth across the portfolio in the months to come.
Second of all, earlier this year, we made the decision to introduce FLNG into our portfolio and go FID on our first project earlier back in March. I believe that the path that we're following IN FLNG will change the liquefaction of LNG around the world is already doing so.
Faster and cheaper liquefier construction combined with access to stranded gas is a powerful combination. The technical solution that we have is on time and on budget.
Cheaper feedstock stock not only represents a big cost advantage to our business but also provides the host countries a path to develop homegrown power and economic activity they desperately need. It's a big win for both sides.
It's a huge stuff for us as a company. Lastly, true energy transition long-term means clean fuels.
Natural gas is much better than oil and diesel, it's cheaper, it's much cleaner, but the real goal is clean hydrogen-based fuels, hydrogen, ammonia, methanol, et cetera. The first part of that journey for us is to identify the problem, which we have and then coming up with a plan to solve it.
It's crystal clear to me what the problem is, and what the solution needs to be, and now it's simply a matter of executing. The first industry you're likely to see be carbonized in a material way is the shipping industry, and it's already happening.
Alternative fuels make up just 3% on the fleet in the water today, yet make up over 30% of the ships being built in shipyards. The first deal will be LNG, soon to be followed by hydrogen-based fuels.
This represents a gigantic opportunity, and our goal is to be a big part of the solution and we have the terminals and infrastructure to be a part of that. So it's been a very good start to the year, so with that, now let's turn to the quarter itself and start with Page number 4.
We have several significant highlights to report this quarter, but it all starts with earnings. Significant increases in Q2 2021 operating -- segment operating margins with further increases expected in Q3.
If you look at Page number 5, not to skip around, we actually lay out by quarters over the last year and then what we expect this year to happen and you can see that we are making material strides now and actually transforming from a development company into an operating company. Q2 last year of $15 million in operating margin, Q2 this year of $130 million our expectation is approximately $210 million for Q3 and $170 million in Q4.
Those are expectations based on what we see right now. Given that we're roughly halfway through Q3, I feel very good about the forecast that we've got there.
We'll talk about this more in detail but you can see clearly the benefits now of not only the terminals themselves kind of coming online, but also the diversification of income sources to go from terminal operations to ships to third-party contracts to gas sales, merchant power operations, etcetera. Our business is diversifying by the day and is growing materially.
My expectation for next year is that we'll be over $1 billion in operating margin. In 2023, $1.250 billion and this is all without any incremental benefit from FLNG, any incremental benefit from Ireland, any material and economic benefit from the organic growth that I expect to see across the portfolio.
So we really are at an inflection point as a company from an earnings perspective, and I think there's much more on that to come. Number two, the big story for the quarter and for the year thus far is really gas, and I'll talk about that in some detail.
But our gas position, bottom line today is essentially flat after the portfolio purchases we've made this year. So I say we make a lot of bad decisions around here, but we make a few good ones and the decision to basically take the volatility out of our business has been a very good one.
At a time in the market where prices have increased by roughly 50% in the last handful of months, we have essentially very little to no volatility in our business. And in fact, that volatility now creates gas and merchant power opportunities, and Andrew will talk about some of the things we've seen down in Brazil about that in just a second.
Three is liquidity. We expect our projects to be self-funded between financing and asset sales.
Chris will detail that in his section, but the bottom line is everything that we have committed to, we can pay for ourselves. We committed on the first leg of our Jamalco sale leaseback, which funded in the last couple of days.
We expect the ship financing to fund later this quarter, but we're very much on track from a liquidity standpoint to pay for everything we've done and be internally financed, which, of course, is my goal. And last, what I already mentioned, the fast LNG, we're making significant progress to the technical work.
We're on time, on budget, and we have a lot to talk about there. The gas sourcing has been very productive and we expect to announce our gas source in the next 60 to 90 days.
So with that, let's flip to Page number 6. And just by way of recap, let’s just talk about where we got to today.
Over the last six years we've been largely focused on development and today, many of the projects are either completed or are nearing completions. And as I said, we're very focused on operations and organic growth.
2016, almost to the day was the first contract that we signed. So we signed -- in 2015, where we signed our first contract with JPS, the utility in Jamaica.
In 2016, we had one LNG import facility, operating margins of negative $7 million. Today, this year, full year, we expect six terminals up and operating by the end of the year for a total margin of $550 million; 2022, 11 terminals, $1 billion.
We've invested over $7 billion in these projects over the years. So we've made enormous investments in both time and money and are now really at the point where we can start to see the economic benefit of all those assets.
I mean if we look at Page number 7, you can see this is the map that shows where the assets are. We obviously have a very significant presence in the Caribbean, in Mexico, in Central America and South America.
Our first investment in Asia and Colombo and Sri Lanka, and there's a handful of other markets which we are actually exploring. But I'd say that the focus of the organization has shifted less from new markets, although there's a handful of things that are material that I expect to show up here in the next month or two, but less from new markets and more just mining the operations that we've got in our operations around the globe right now.
Page 8, the path ahead is clear and I already mentioned this. Energy poverty is very, very real.
This chart on the left-hand side shows you this very graphically. Electricity consumption in the United States 11,500 kilowatts per person, Nicaragua at the bottom of the scale 552.
The gap is -- it creates tremendous disparities in terms of both health and economics and is one that can be addressed by exactly the activities that we have. Number two, though, is the sustainability and the energy transition is a must.
51 billion tons of greenhouse gases are emitted minute every year, enormous weather events happening daily. It's no surprise that the entire world has woken up to this as an issue of our generation, and something needed to be addressed today.
Just this morning, Exxon announced that they intend to be carbon-free by 2050. This is just another one in a very long string of decarbonizing events by different companies announcing over the years.
And we think it's only going to accelerate from here. That creates not just huge problems, but huge opportunities for companies like ours.
So we look at the gas briefly, and again, I mentioned this already, so flip to Page 11. What have we done since last quarter?
We bought in about 50 cargoes and are now fully committed for the demand that we have on the books for the next six years. The chart on the left-hand side of the table shows you by year what our cargoes are that we think -- that we need in order to satisfy our customer needs and what we brought in, and you can see that we're essentially flat.
The average cost of our LNG portfolio right now is Henry Hub, times 115 plus 256. So a material discount to where the market is today.
We don't intend the LNG book to be a trading book, but are very happy to have reduced our volatility in this regard and be matched and have done so at a price that is materially below where the market is. And that protects us from LNG price volatility going forward.
Briefly in the next section, and then I'll turn it over to Andrew to talk about Brazil, but let's just touch on the FLNG. So Page 13, this is the cartoon that I've shown you before that shows basically how this works.
And really, the point of it is really twofold. One is to take existing marine infrastructure and modify it so they can actually be used for an LNG liquefier.
In our case, what we've done is we bought a couple of jack-up rigs. Those are being cleaned off of the equipment that we don't need, repopulated the equipment that we have modularized, and have made fit on there, and they'll be deployed offshore.
That allows us to do two things, allows liquefaction of stranded offshore gas and delivers a technical solution that's faster and cheaper. How big is the opportunity on Page 14, the answer is, it's a gigantic one.
There's stranded gas all over the world in different geographies. There's only 7 FLNGs that are actually operational or under development today, representing less than 3% of what we think are the total amount of the market.
So there is a huge, huge need for access to a solution for these stranded fields. And we think that we have the right tool for the job.
Page 15, we were talking about this the other day, and I was reflecting back on another business which I was involved in many years ago. We -- back on our private equity days, we made investment in a modular housing company maybe 20-something years ago.
And I spent a bunch of time looking at the production of the modular housing and what I discovered was that in the process of making a house inside of a factory, there's two things that happen; a) it happened a lot faster than if you built it out in the field; and b) it happened a lot cheaper. So modular housing was 20% cost savings, 40% to 50% savings in cost, and there's a lot of parallels between that and what we're doing here because essentially, we're building a factory for liquefiers that we're bringing the gear to and installing as opposed to stick building it in the field.
Traditional liquefaction costs $600 million to $700 million a ton. It takes four to five years to complete and is hard.
I mean you actually have to bring all the technical people to the far corners of the world where a lot of these gas fields are, it's very hard to get welders, steel workers, your cryogenic engineers, all the technical people that you need on site in production there. Building it in the shipyard in Corpus Christi, Texas, which is where our first one is getting built, allows us to access all of that high-quality talent in the Gulf Coast do so both faster and much cheaper.
So we think that the potential savings are 30% to 40%, we think the savings in time is even greater at 75%. So cheaper, faster and more reliable.
And you can see on Page 16 where we are. These are the first two jack-up rigs that we bought.
I think we paid just over $31 million for the two of them. So basically bought them for scrap purposes.
Those are both in the shipyard now at Kiewit, I'll be down there in two weeks going through them firsthand. But basically, the process is to strip off what is there, reinstall and assemble what we've got, and we think that our schedule of being ready to install this in the second half of next year is very much on the path.
I'll now turn it back to Andrew Dete in the room with results. Andrew?
Andrew Dete
Thanks, Wes. Hey, everyone.
Great to talk with you again and excited to share more on our business in Brazil with you. So two goals we have today to communicate about Brazil.
First is to share a bit more information on our views, kind of on our macro thesis in Brazil and now some of the current events playing out in Brazil around power and gas shortages really accelerating the opportunity for us. And then two is to talk about kind of how that situation translates to commercial momentum for us.
And to give you some information on where we are commercially in Brazil, and how good we feel about the next steps. So starting on Page 18, we wanted to kind of simplify and distill a message about what's happening in Brazil today on the power side and on the gas side.
So kind of going left to right on this page, what we have in Brazil today are hydro shortages leading to power shortages. So the electric get in Brazil is basically underpinned by hydro.
However, you measure it, it's about 65% to 75% hydro power. There's about 2 -- over 200 hydro power stations in the country.
However, what we've seen kind of in a sustained downward trend over the last seven years is hydrological shortages. So lower rainfall and lower water flow in the dams.
And this year, in 2021, we're seeing real acute hydro shortages leading to power shortages throughout the country. What that does in Brazil is that means you have to compensate with thermal dispatchable power.
And so basically, all the natural gas power plants and frankly, some of the oil and distillate fuel power plants turn on at that point. And you ship basically all the domestic gas production to power and that leaves the gas shortages, which we're seeing in the second box here.
And for NFE, this situation, which has become really acute in the last few months in Brazil, leaves a significant opportunity, and we'll take you through that. So Page 19 gives a little bit more data and information on what we're seeing.
So on the left side, you can see the data here on kind of what I'm talking about where in 2021, we're actually 50% below the 20-year average for the water inflows and the reservoirs in Brazil. And almost more importantly, what we've seen is really a sustained downward trend.
So it's pretty normal that in Brazil, you would see a fluctuation on the hydro data year-over-year and certainly like seasonally. But what we're not used to seeing is this kind of sustained downward trend.
So typical management practices would be reservoir management or compensating with some renewable fuels and kind of thermal dispatchable power. But when you have this kind of secular downward trend on hydrogen flows, you end up relying a lot more on that thermal generation, which isn't really built to sustain the system.
And so on the right side, you see the consequence of that, which is -- in the last month, we've seen spot power prices that are 10 times above the 20-year average. And that's caused by having to turn on not only all the gas-fired power plants but to turn on the sort of older and efficient, much more expensive diesel and HFO-fired power plants as well.
So what's that mean on the gas side? On Page 20, we wanted to slow down the kind of simple situation that's happening on the left side of this page.
So the blue box is really the domestic gas demand, if you assume there's no demand for thermal power. The gold bar is basically domestic gas supply.
So even in kind of a no thermal power demand situation, you still rely on a bit of imports, which come from Bolivia or come from LNG imports that Petrobras has. And then what happens is when you fire all of the thermal power plants, you can actually increase the gas demand by over 65%.
It's about 11 Mtpa or 18 million gallons a day. And so you go from kind of needing a little bit of imports to cover your supply-demand balance to needing a ton of imports.
And in a situation where you have Bolivian gas declining, you have really high LNG prices in the spot market. And frankly, you have a limited infrastructure build out of the Petrobras 3 LNG terminals today, only 1 of those is operating.
Actually being able to import this amount of gas is very, very difficult. And what that means is, for us, as an LNG provider not relying on domestic gas, we're really of extreme value to the system.
And we're just seeing massive shortfalls today. So on the right side of Page 20, it kind of follows the same pattern we've been talking about.
So we just try to pick out two things from the press that kind of fit on the same time line we've been talking about. So first, a lot of report on really high spot prices and the notice that the Brazil system is kind of not set up to deal with the current crisis.
And then secondly, we have some big announcements and a very big one yesterday about gas shortages. Petrobras is now announcing that they won't be able to renew gas supply agreements to the state distribution companies in the Northeast, which is really the area around our Suape terminal.
And so we're seeing the same trend play out in the press. But first, we noticed how power prices and that leads to significant gas shortages.
So on Page 21, the big question, obviously, is how does that translate into opportunity for NFE and what are we doing about it? And so on the power side, we have our 1.5 gigawatts of GP power plant up and running today, receiving capacity payments, and dispatching 100% of availability.
Given the situation we're talking about, so GP is fully dispatching, and receiving payments for emergency security or in merit dispatch as required. We have the Suape power plant, 288 megawatts.
By our analysis, it's actually the next thermal power plant in Brazil that can turn on to the fastest in Q4 2022. So of strategic national interest, and we're seeing that in our relationship with the regulators.
And then we have our 605-megawatt Barcarena Power Plant expected on Monday Q1 2025. On the gas side, our Barcarena LNG terminal EPC contract is signed and will be online in Q1.
Our Santa Catarina LNG terminal EPC contract is signed also will be online in Q1. And then we've signed an MoU with Norsk Hydro at our Barcarena terminal for 1 million gallons a day which we're actively negotiating and hope to finalize very soon.
And then we're announcing the signing of an agreement with an industrial customer at the Suape terminal for 1.4 million gallons a day. And so those two agreements, I think, really just are starting to show the value proposition our terminals have for gas supply in the country, both due to shortages in the case of Suape and Catarina and in Barcarena, where you don't have any gas today, and we're really the sole supplier.
And then we have tremendous momentum in our off-grade business, so ISO-container business. And we've signed three exciting agreements for us.
So at Santa Catarina, we have two agreements signed, one with SCGas, who's the state distribution company in Santa Catarina, 66,000 gallons a day. And then we have a pulp and paper customer 50,000 gallons a day also from the Santa Catarina terminal.
And then we've signed an important partnership with Gastro Perra, who's the distribution company for gas in our Barcarena terminal, 88,000 gallons a day with a lot of room to grow as we continue to invest in infrastructure with them and increase the gas footprint in the state. And so what that really means is on the right side, we're sort of re-underwriting everything we've seen in Brazil.
And so in April, when we closed, I think we announced a $410 million number in terms of our opportunity in Brazil. And as we look more at that number, we're really raising that base case to $525 million.
And that includes everything we're talking about on the power side as well as gas sales from our terminals and then our off-grade business. We're seeing real momentum across all of those businesses given the sort of underlying macro situation we're seeing.
And then we're excited about the upside in those businesses as well. We think especially on the terminal side, in the building of new power, expansion power, emergency power.
And then we think the most upside opportunity might honestly be in the off-grid business where not only in the Barcarena terminal we're the sole importer of gas, but really in the other terminals where we're connected to the coastal pipeline system. But frankly, large municipalities and industrial customers who are just off the coast or not, and are very hungry for gas and we're bringing kind of knowledge and know-how from our other operations to really start that sort of off-grade ISO container business in Brazil.
So the demand and momentum there is tremendous for us, and we're really excited about what our team has been able to do there. So we see $225 million of further upside for a total opportunity of $750 million.
So on Page 22, we set around and tried to kind of think about the main messages, 120 days on from the acquisition of Hygo, which closed April 15th, so a little less than 120 days. And we have three kind of main takeaways as we sort of look back on our thesis at the time of the acquisition and where we are today.
So first is, we believe in a very high-volume gas supply opportunity in Brazil, a country of over 200 million people with limited infrastructure build-out and a real need for energy. And we're also seeing strong margins in that business.
So a couple of facts sort of conspired towards that. One is the passing of the new gas law in Brazil, which is basically accelerating the reduction in Petrobras' monopoly on gas supply as well as sort of overarching macro trends on commodities.
We really see a strong margin business as well on the pipelines. Two is, one of our thesis for buying Hygo was that we saw strategic terminals, but also terminals that were in advanced stage of development.
So we're really benefiting from great permitting work that the Hygo team has done to get us in a place to actually turn these terminals on in Q1 2022 for Santa Catarina and Barcarena and in the first half of 2020 for Suape. So we've also made great strides in terms of quickly getting those EPC contracts signed and really excited about our progress on the construction side.
And then third is continuing to hit on our small scale and off-grid opportunities. I think this is a business in Brazil that's going to continue to grow.
Diesel prices in Brazil are $18 to $22 per MMBtu. We have an amazing value proposition.
We have a really great team in place. And we're seeing really small-scale partnerships across our terminals that are going to be really great for us.
And we're seeing, frankly, really large off-grid opportunities for large industrial companies that don't have gas access today and can really benefit from it. So -- those are kind of our three takeaways on re-underwriting the business and how we're seeing it and look forward to any of the questions we have as we make progress in Brazil.
Thanks Wes.
Christopher S. Guinta
Thanks, Andrew and good morning, everybody. A couple of opening points that are important to mention.
I'll ask you to turn to Page number 24 in the presentation. With the Hygo and the GMLP transactions closing on April 15th, this is the first quarter where our consolidated financial statements reflect the performance of those newly acquired assets and subsidiaries.
So considering this, I wanted to take a quick minute and tell you about the changes and where the cash flows show up throughout the financials, the footnotes and the MD&A included in the 10-Q. This quarter, we are including the results of our business broken out into two operating segments, which we are calling our Terminals & Infrastructure segment and our Ships segment.
In the past, volumes were the biggest indicator of revenues. But where the business is today, we have a much more diversified portfolio of cash flows.
In our Terminals and Infrastructure segment, we make money through gas sales at our regasification terminals, power sales, which include capacity payments, long-term sales under PPAs and merchant revenues, direct-to-consumer small-scale gas and power sales, including equipment rental charges, and trading activities of our LNG cargo portfolio. Also, we have our ship segment that makes money from both the long-term charter of vessels out to third parties and trading the vessels in the spot market.
This segment includes the 11 GMLP assets and the two LNG carriers that were acquired in the Hygo transaction. Now the nuance in this segment is that as vessels go off hire to third parties and then are used as part of our downstream gas sales, the cost of that ship would be included in operating expense in the terminals and infrastructure segment.
The second major change about the way our financials are reported is a result of the accounting treatment for entities that we do not effectively control 100%. For NFE, this is the Sergipe power plant, which we own with our Brazilian partner, and the Hilli, which we co-own with Golar.
On the income statement, our share of operating income from Sergipe and Hilli will be seen in the income from equity method investments. However, if you look at the segment measures in the MD&A, we're showing our 50% share of this revenue and operating margin contribution to their respective segments.
Turning your attention to the financial performance for Q2, we sold an average of just under 1.5 million gallons per day for the quarter and earned a revenue of $224 million. Starting first with the Terminals & Infrastructure segment, the operating margin was $55 million, which is up $12 million from the prior quarter.
On the Ship segment, we had quarterly operating margin of $76 million, which is slightly above what we were expecting when we made the acquisition. As you take a look at the balance sheet, we added about $2.3 billion of debt, which is comprised of $1.7 million that was raised at the NFE corporate level and approximately $660 million that was assumed as a result of the transactions.
The bulk of this is in the form of sale leasebacks, which we further outlined in the notes of the financials in the 10-Q. On Slide 25, this is an important page to convey the SG&A costs that we incur in running our business and how those are broken down between core operations and growth.
Just to orientate everyone, the bottom line on this page would be what ties to total SG&A plus transaction and integration expense running through the financial statements. Above, we've broken this down into three key categories.
First, this non-capitalizable line includes a variety of items that we would ordinarily be able to capitalize if we had gone ahead and taken or declared FID. This includes things like engineering, consulting or permitting expenses that would occur prior to our formal decision to proceed which would result in the capitalization of costs from that point forward.
This line also includes our transaction and integration expense for things like M&A transactions or nonrecurring corporate reorganizations, which obviously was elevated during Q2 on account of the mergers. Second and most importantly, this core SG&A includes costs that are unavoidable and essential to running our company day-to-day.
This includes a portion of our in-office employees, benefits, rents, some insurances, audit and professional fees. Third, growth SG&A includes the costs that are directly attributable to our efforts to grow and expand both at current terminals and in new ones.
So this is largely sales, development, salaries, some professional fees like legal and engineering, and the bulk of our travel expenses. The takeaway here is that if we truly just were running out the operations of the core business, this can be done for around $40 million per year, however, our gross SG&A reflects our choosing to invest in opportunities that we believe will result in increased cash flows over time.
If you turn to the next slide, this will be pretty familiar to you if you listened to our investor call a couple of weeks ago, but the headline truly speaks for itself. The capital for all of our projects under construction or under development are expected to be self-funded through a combination of cash flows from operations, ship financing that we are currently in the market with, and selected asset sales.
The uses on the left side of the page totaled $1.6 billion and include the cost-to-complete construction on all of our terminals, including the three in Brazil, Ireland, Sri Lanka and the remaining cost for our first fast LNG asset. Turning to the sources quickly, we recently put in place a $75 million letter of credit facility that allows us to free up restricted cash, and we will use the facility to more effectively manage working capital for things like LNG cargo purchases, our first asset level financing, the sale-leaseback transaction of our Jamalco power plant is progressing very well with approximately $100 million funded to date, and the balance is expected to be committed and funded by the end of the month.
On the ship financing facility, we are currently in the market with $300 million committed and strong interest in the balance. This facility will be secured by nine vessels, has a three-year term and is priced at L-plus 300.
And finally, we have a strong portfolio of assets with long-term stable cash flows that would be ideal for asset level financing or sale leasebacks. We put $400 million here to level the sources and uses, but we believe that we have over $2 billion of possible proceeds against these assets.
With that, I'll turn the call back over to Wes.
Wesley R. Edens
Great, thanks. So the last section I put in here is one on valuation.
And maybe even before I get to that, just to kind of summarize the half point of the year, I think this is -- we're in the public markets, we're in the business of providing quarterly updates, those are pretty short periods of time. A six-month update and a one-year update is a good scorecard to look at how we've done.
When I rolled back at the beginning of the year, and I think of the decisions we made to make the two large corporate acquisitions, I've got a few thoughts about it. We've made, as I said, plenty of poor decisions over time and a handful of good ones, and I think that these are both going to go down as very, very good investments.
Just when you think about the Hygo transactions, what we bought at the time was $130 million in cash flow, we paid about $3 billion for it. Now we have late-stage developments in Santa Catarina, Barcarena, and in Suape but we're still missing a handful of the permits to complete on it, and we had, as Andrew said, basically, no commercial contracts at the time.
So it was an aggressive acquisition, but it was one that was based on the market opportunity that we saw in front of us, which has only improved actually since we have done it. And it was our belief that we could actually also given our experience in the development business, take this from being close to be completed to actually completed.
And so where are we now? We finished the permits and we signed PC on Santa Catarina and Barcarena and Suape is right behind.
As Andrew said, we'll sign next week, long-term commercial contracts that approximately double the size of our commercial contracts and volumes as a company. And this is barely scratching the surface.
Brazil is a huge market that has significant challenges on the energy front and that presents massive organic opportunities for us. As Andrew said, when I -- the current re-underwriting investment is materially higher than we underwrote in the base case and upside could be double that or more.
This is a very, very good investment. It's a very large one.
So we feel great about that. Second, the decision to buy the ships in large part was a defensive one.
We know that we need ships and we need FSRUs to complete our terminals, and I was concerned about the pricing on the market getting away from us. In hindsight, that also looks like a very good decision.
Shipping prices and shipping costs are up 25% or more across the board. Time lines to get new assets are extended and we basically bought the ships and the FSRUs that we needed at the time that we need them.
We get income from those that are being used by third parties right now, eventually it is as Chris said, those will be integrated into our terminals as we bought very high-quality assets and we did so in a way that both like prevented us from the downside of actually having to go out into the market and contracted buying these assets and do so in kind of one fell swoop. So these two decisions together I think, are both very good ones.
In terms of valuation, I've got a very, very simple way of looking at it. We have spent, as I said, a little over $7 billion to get to where we are today.
So when you look at our expected margin for next year of $1 billion, 1 divided by 7 is about 15%. So what you're building essentially is irreplaceable energy infrastructure assets in these markets, the development yield next year is 15%.
So it's a very, very high yield relative to the value of those assets today, and we're just beginning. At $1.25 billion in margin, that's about an 18% development yield at $2 billion, it's at 28%.
So you're building assets and you're buying into the market today at a huge discount in terms of what the capital value of those assets would be, assuming nothing else happens, assuming nothing else happens on the FLNG side, so nothing else happens on the energy transition side. This said, energy transition is one of the most powerful forces in the world right now.
The weather events, the climate change, the focus on people on carbon taxing to force decarbonization across industries is a massive, massive, massive impetus, and we are in the forefront of that. And unlike most of the other companies in this sector, we actually make a lot of money.
And so we're just now at the point in time where you can see material amounts of economics roll to the bottom line, right. So from a year ago, at $15 million through today at $130 million to the next quarter at $200 plus million, next year at $1 billion.
We're right now just starting to actually turn the assets that we have. I was joking with someone the other day, I feel like the six-year overnight sensation.
Maybe it's the seventh year that really matters. Seventh-year for the bucks ended up being a pretty good one.
So maybe the seventh year that's ahead of us, and this is going to be equally good. So from a valuation standpoint, I think it speaks for itself.
I mean in any metric, as far as I'm concerned, these are vastly undervalued. And now as we execute and continue to grow the business, I think we'll present some great opportunities for shareholders in the future.
So with that, I'd like to turn it over to the operator and happy to open up for questions.
Operator
[Operator Instructions]. Your first question comes from Spiro Dounis, Credit Suisse.
Spiro Dounis
Hey, good morning. First one for you.
The slides pointed to a transition in the current year, just sort of between going from a development company to an operating company. I feel like this is probably the first quarter where we haven't really seen a sort of new big initiative announced.
So curious, is this kind of the pivot now towards full-bore execution on the products in front of you and kind of what you see is what you get?
Wesley R. Edens
No. I mean, we actually made announcements because this quarter we had actually had an agreement in Sri Lanka, which is 20 million people that doesn't have a natural gas line.
So we think it's a huge opportunity. And there's a handful of other new opportunities that are out there.
So those are all things that are in the works. What's very clear though is that with the current list of businesses that we have and the market opportunities in front of them, we can generate we think, billions of dollars in repeatable income from the existing assets.
So that obviously is the focus. I mean the company has really got three very distinct phases.
The first is the development stage of going into a market, identifying the opportunity, getting permits and building something, number one. Number two, is then to commercialize that and that's where we're right in the thick of been doing in Brazil right now.
It's hard to commercialize until the actual assets exist. Our assets that exist now changes everything.
So I was down in Mexico for the opening of that terminal, we're going to host investors down there in the month of September, so if you're interested to be a good field to go and see firsthand what is down there. But these are massive infrastructure assets that are irreplaceable, and they're amazing.
I think they are works of beauty. And the works of beauty not only because they look great, but because the economic potential that they have is actually really substantial.
And the third part of it is then just the operations. And so operations, we're going to go from a development company to a commercial company to an operating company when you think of it right now.
And so at the end of the day, it will be dozens of terminals and dozens of ships and hundreds, if not thousands of people kind of running around. I've had quite a bit of operating experience across the years in many, many different businesses.
This is a very, very simple one to operate because the nature of what we do is not that complicated. It just -- it's like any good operating business.
The question is like, can you do it cost efficiently, and can you do it safely in all these different markets around the world. So it is a pivot point for the company to go from purely focused on developing to operating.
It doesn't mean that we're not going to continue to develop new markets. And I think that -- but I think that with what we have right now, I think there's so much value in the ground in these different markets, that we think that simply mining what we've got right now is a very, very productive thing to do.
But now you should expect, I mean, I expect that we'll have at least two or three new countries that will open up for us that are material between now and the end of the year based on what we see right now. But it's simply not the focal point of a call like this, when we've got so many other things to talk about.
Spiro Dounis
Got it. Understood.
That's helpful. And if you could just sit on that.
Just in terms of the countries, obviously, you're now in Asia, if you see at least one of those two or three it is also going to be in Asia, and just curious if you can help us triangulate around that?
Wesley R. Edens
Asia, Africa, those are big markets, more in South America, more in Central America, more opportunities in Mexico. And we're -- I mean I read your note I looked at the other notes this morning.
I think you guys -- I honestly think that the market is missing the point a little bit. When you develop these terminals, it's not the endpoint of the commercial transactions, it's the beginning point of them.
In each of these markets, as I said, you're going to see more transition of fuels in power plants in places like Puerto Rico and Mexico, absolutely. You're going to see significant bunkering.
I mean it's not in any year in house, the bunkering opportunity in the marketplace is gigantic. One ship that fills up -- just to put it in context, one ship that fills up in Jamaica is going to take on 10,000 to 12,000 cubic meters of fuel in one loading.
Mean any kind of bunkering activity in Jamaica has the possibility of doubling or tripling the volumes that run through the country, and they're already quite substantial. So these are essential pieces of infrastructure with massive organic opportunities and our development yields on them on next year's numbers are 15%.
And whether you or other analysts, I hear people are concerned about the execution of this, I think you missed the point. With all the money in the world, you can't go back and rewind the clock.
The developments that Andrew is talking about in Brazil, those developments for the most part, started in 2015 and 2016. So they are right now at the point of turning on and the commercial opportunities are just beginning.
And so I think it's -- at the end of the day, it is what it is, and the numbers will speak for themselves. But I think that the value, the commercial value of these terminals is gigantic.
Because you can -- as I said, the infrastructure business is quite simple. If you build something for one reason, and they don't use it, you lose all your money.
So you build the toll road that nobody drives on, that's a bad infrastructure investment. If you build an infrastructure investment that not only one person uses, but two people use or three or God forbid, four or five, you make all the money.
And each one of these infrastructure assets now has the ability to bring natural gas as a replacement fuel which is both economically cheaper, it's cleaner, it's a much better alternative to diesel and heavy fuel oil into all these countries. And it's just now a matter of doing the work to do it.
And in places like Brazil, yes, it's a big competitive market. 95% of the cities in Brazil are not on natural gas.
And we have -- we'll have four terminals by this time next year to actually bring it from North to South. So I'm not frustrated by it because I think at the end of the day, it will take care of itself.
But I just think that from my perspective on it is that building these assets is incredibly valuable, and you're just starting to see and barely scratch the surface, frankly, of what the organic growth is going to come from that.
Spiro Dounis
Yes, perfect. No push back at the utilization -- in the system.
Sorry, second one for me, and I'll be quick about it. Just in terms of CAPEX and timing, it is likely a pretty clearly, you've got sources and uses lined up pretty nicely in terms of total dollars.
Just curious, as you think about that sort of timing when the sources come in and when those users have to go out, any sort of gap that could materialize there and then how you plug it if that happens?
Christopher S. Guinta
Hey Spiro, it's Chris. So obviously, the biggest driver that changes how you use cash flows from operations to fund CAPEX is the pace of that CAPEX.
So when we take FID, I'll just walk through very quickly an example. When we take FID on a new terminal or a power plant, that begins the development cycle, which usually lasts somewhere between 9 to 18 months depending on the project, the geography, the greenfield versus something with existing infrastructure, etcetera.
So initially, the costs are largely engineering or permitting or other soft costs that may have some deposits on long lead procurement items. Then the project will pick up, you'll have more labor, more construction activities, and then finally, commissioning and commercial operations.
If I oversimplify, there's about 10% of the total CAPEX spent in the first quarter of the project, about 10% spent in the second quarter of the project. And then it ramps to about 50% being spent in the back half of the development time line.
But here's an important point, it leaves around 30% of the CAPEX spent post COD, which provides both a little bit of a warranty against the providers of equipment and services, but it also allows us to match the CAPEX outlay with some of the cash flows from operations.
Spiro Dounis
Got it, its helpful Chris. Thanks Chris.
Thank you Wes.
Wesley R. Edens
You bet, thank you.
Operator
Your next question comes from Alonso Garcia, Scotiabank.
Alonso Guerra-Garcia
Thanks, hey guys, good morning. Maybe honing in on Brazil and Wes, you alluded to this a little bit, but thinking more about your competitive position, obviously the opening of the gas market is allowed for new entrants and from your slides here, it looks like you're participating in a couple of public tenders for Suape, in Santa Catarina.
I guess how do you see the competitive landscape there, I mean, obviously, it doesn't seem like other developers can provide what you can in those markets with your projects under development, but I wonder if you can talk to your competitive advantage at all?
Wesley R. Edens
I'll let Andrew talk about it in a second. But I think the big picture in Brazil is that you've got a massive country.
It has been served by monopoly, by Petrobras historically, but it's actually really changed. And the other big aspect of the market is it's a market that is dominated by hydroelectric power, 65%, 70% of it that is currently experiencing the 100-year drought that may be not a 100-year drought because maybe this is the way that it's going to be going forward.
And so when you shift people need electricity, and they shift those gas supplies onshore to providing electricity, you end up with massive gas shortages and the prices then reflect that, and it's a bit of a mess. And that bit of a mess creates an unbelievable competitive dynamic, unbelievable competitive dynamics.
And really, I think long-term planning in Brazil has always been focused on the offshore gas because there's so much in the pre-salt gas fields that are there. Those are long ways from being realized.
Those are substantial competitive or just industrial challenges and bringing it onshore is very, very expensive to do so. And so I think long term, we believe that there will be gas that comes in from offshore, but it's not going to be any time soon.
And so what you got today is exactly as Andrew described it, which is you've got these terminals that are in place, they'll be completed. They're EPCs.
So unlike a lot of the other developments we've done, which have been self-developed essentially, we've got third-party price certain, time certain contracts to be developed, and we have massive like industrial contracts as a result of it. And I think that we are literally just scratching the surface.
Each one of these terminals represents a portal into that geography and the often grid opportunities, both at power plants and industrial customers up and down Brazil is really gigantic. So Andrew?
Andrew Dete
Yes, it's a great and layered question because we're doing so much across power gas, soft grid, etcetera, but let me try to quickly hit a couple of things. So on the terminal side, on the commercial side and then kind of on the overall demand side.
So terminals, there's two things we really think about in combination. One is we have a really big head start.
So permitting in Brazil is hard, it takes a long time. Buying Hygo gave us a great head start on strategically located terminals.
So what I mean by that is Barcarena is a sole point of gas in the Northwest, mouth of the Amazon Basin. Suape is at the end of the kind of coastal pipeline system in the Northeast and in a region that needs energy, needs gas, and is traditionally economically kind of worse off than the rest of Brazil.
And then in the South, kind of at the end of the Bolivia pipeline system, Bolivian gas is drying up. And so I think -- what I think about it is a head start and we also got to realize we're sort of not in the middle of things, right?
We're not -- these aren't terminals kind of in the middle of Sao Paulo, where all the offshore gas is coming online. These are terminals that are really thoughtfully located to take advantage of all of the kind of trends we're seeing, which is high transport cost, high molecule costs, etcetera.
That leads me into what I'm seeing every day on the commercial side, which is our contracts versus Petrobras contracts. And so we have a lot more flexibility than a state-owned monopoly that is basically charging people kind of various fees that don't need to be there, a total lack of flexibility.
And so we have an offer in the market that I think is better from that perspective. And then also from a price perspective, it's less volatile.
I think one of the trends we're seeing is Henry Hub pricing, frankly, is less volatile on the commodity side and overall, has more of a fixed portion than Brent-based pricing, which has been kind of a difficult thing in Brazil for consumers. And then we also bring the small scale opportunity.
So if you think about how we work with some of these distribution companies, which are going to be really big pipeline volumes, we go in there, and we work on both the off-grade side with them, where we're going to provide gas to municipalities that don't have it today in their state and also work through on large pipeline volumes. So we kind of have a differentiated offering on that side.
And then the last quick thing I would say is, we're hyper focused on competition and I think we have that mapped, and we'd love to talk more about it. But we also are just seeing kind of a -- when you look at the demand side in Brazil, I think one of the things we have realized is it's supply constrained.
And so the other thing we've realized just in our travels and experiences is the amount of overall stranded gas, I think, is probably undercounted, meaning that demand that would be there if there was supply. And it's a hard thing to kind of put numbers around easily or to present income on an earnings deck.
But our experience is that there's a tremendous amount of more demand that we think will come from having gas in these strategic places.
Alonso Guerra-Garcia
Great. No, that's really helpful, Andrew, appreciate that.
And this one might also be for you. I guess as a follow-up, it's been several months that you guys highlighted it was $1.50 to $2.50 per MBtu margins for Brazil.
And it sounds now that you're -- I mean, you are advancing on the commercial side here with the industrial contract and some others underway. Are you expecting to see higher margins there, is that sort of a fair characterization, or I guess, can you talk to how the economics are developing there?
Andrew Dete
It's really both higher and lower. I mean the estimate we gave is kind of a blend of it all, and I think ultimately the margin for the country will be a question of how much of it is off-grid.
It's in the higher margin versus the on the pipelines, higher volumes, lower prices. But I think we feel very, very good about pricing overall and the estimate we gave before, we think is a very good one.
But -- so I think on pricing, we feel like the guidance we've given in the past is what we expect in the future. I think on volumes, I think it's possible we have greatly underestimated what the volumes can really be.
Both given what the landscape of what's happening down there and just now that we're seeing as we get closer to completion of the developments and really start to get into real serious commercial conversations.
Alonso Guerra-Garcia
Got it, great, and I appreciate it.
Operator
Your next question comes from Sean Morgan, Evercore.
Sean Morgan
Thanks. Hey Wes, I know you guys are obviously going to try to do the FLNG a little bit more expeditiously than we've seen in the past.
And I think now that you're a 50% owner in the Hilli, you're probably well acquainted with the history of that project. And I think one of the biggest sticking points was that Golar's partner had a lot of leverage over the pace of production.
And so it's likely that the fourth trend is not going to be fully utilized before the contract expires. So as you sort of look at potential E&P partners for the Shawfield well developments, how are you sort of weighing tolling agreements versus just control of the E&P and then having like the ability to sort of set the pace of development of those assets?
Wesley R. Edens
Well, I think the Hilli is a great learning experience, right. So it's certainly good to see it firsthand and see how well it operates.
I think that is basically a net lease asset for the moment, right. Now it's a piece of equipment that's leased out, as you said, and they don't really control the production of the LNG, at least at this point, and that could change obviously, but that's where it is today.
Our focus is quite different on the projects we're looking at. And really, it could take a lot of different forms.
But in the simplest form, it would be to go to somebody that has a current producing oil field that has got a lot of associated gas that they are flaring or reinjecting or not using, right. So that's one, where we would be an offtake partner with them, and we would liquefy and actually monetize that.
And so I think there's a special place in having for people that can actually stop flaring and actually also commercialize it. And so those are the highest priorities.
But there's a number of different situations and as I said, there's a fair bit of variety of one versus the other. The one thing that is clear is that there is no shortage of stranded gas fields to be monetized.
And the approach that I'm taking, which I think is the right one, that we're taking as a company, is we want to be partners with the countries that have got those fields and not only offer them an economic solution for the gas, but also be an industrial partner to help them develop power plants onshore. The gas is cheap enough.
I do think on the hydrogen side, cheap feedstock gas is what's going to lead to hydrogen and ammonia production. And it's quite possible maybe a producer of gas in a place, a producer of power, and a producer of ammonia, all in the same place.
So there's a lot of different aspects to it. But I think the key thing is owned and control the hardware, which is the FLNG unit, and then find a good commercial partnership that can really benefit both parties, and that's what we're looking for right now.
But we have a lot of different, I think, very interesting situations and discussions going on. And I expect that one of them will make a decision and one of them here in the very short term.
Sean Morgan
Okay. And it's good to see that the former GMLP assets are contributing, I guess, really at the revenue level NFE operating income level.
But have you found identified new ways since you've kind of taken control of those assets to use them internally that you can kind of talk about or at least existing plans?
Wesley R. Edens
Well, I think we'll be reporting this in third quarter results, but I already know what some of the results are because we're in the middle of the third quarter. But what's happened for the first time, you see really the benefits of having an integrated gas and ship and power business and it allows you to move into different transactions.
So for example, the high prices in gas in the world with shortage of gas have led to some very, very high prices and transactions that are out there. And the ability to access those is in part having gas is in part having access to ships.
And so I think we'll have some good things to talk about with that, I think, in the very near term, but I need to run the second quarter results, not the third quarter results. But there are some clear examples of why having that integration is really useful and necessary.
The biggest cost that we have in our business is gas, the second biggest cost we have in our business is ships. And so these are -- from a defensive standpoint, we want to mitigate our exposure to changes in prices and cost.
But also there is a material upside to then being able to take advantage of a situation where somebody may need some gas and situation if you have both the gas and you have the transportation to get it where you can take advantage of that. So there's some very tangible, very specific things there that we'll talk about.
But it's really good. And I think that it's just part of the development cycle as a company.
As we move from building stuff to now operating stuff, we want to have best-in-class capabilities in every aspect of it. And I think we do.
The development side, I feel great about the gas that I feel great about the ship side, we feel great about. And now just making those all work together in harmony is what really creates the opportunities.
Sean Morgan
Okay, thanks Wes.
Operator
Your last question comes from Devin Ryan, JMP Securities.
Devin Ryan
Hey, great. Good morning Wes, and appreciate you guys squeezing me in here.
I just want to talk a little bit more about Brazil, I guess, to start. And I really appreciate the update on the power challenges and how that's accelerating the opportunity for NFE, curious how the contract or how long the contracts are that you're signing, how much more infrastructure outside of what NFE is doing is being kind of compensated and brought online, and just whether some of the solutions you're looking at are to bridge the gap versus real kind of long-term kind of operating opportunities?
Andrew Dete
Thanks for the question. It's a mix.
I wouldn't say there's anything that I feel like is bridging the gap necessarily. So I'd like to kind of move away from that.
But then I'll say that our contracts are a mix kind of just based on where we are in the market. So if you look at Barcarena, I think you'll tend to see longer contract terms there because obviously, we're coming into a market where we're shifting from HFO and diesel-based fuels to gas.
And actually, I think a lot of those consumers want to have kind of longer-term price certainty. On the pipeline, I think you're going to see kind of five-year type contracts, which are a little bit more in line with what people are used to doing on the pipeline, but actually for them represent a decent amount of term.
And I think one of the things we feel like from a value proposition stand, what we can do is offer that term instead of what they have with Petrobras today, where they basically have one or two year terms, and frankly, they have quarterly re-ratings of the price based on the Brent price level at the time. And so on the pipeline for those guys, five years actually is a long term.
And then on the off-grid stuff, I think you're seeing kind of somewhere in the middle of five to ten year terms. And so it depends on the customer for sure.
It doesn't look that different, I think, than the rest of our business. Barcarena, like I think we said is always going to look a little bit more like the rest of the NFE portfolio.
And I think we'll be able soon to kind of show you some of those details probably next quarter. But on the pipeline, it's a little bit shorter, but I still think we're expressing our value in having some longer term than they have today.
Wesley R. Edens
Yes. I mean the first two big contracts, though, one is a five-year, one is the 15-year and these are for one million-plus gallons.
I mean, so these are very significant [indiscernible]. Andrew gives the right color.
The pipeline stuff is likely to be shorter, longer than what the current tenure is, but shorter. But there's real term, especially at the end of the pipeline.
So...
Devin Ryan
Okay. That's great color.
I appreciate it. And then just a bigger picture question, Wes.
I think there's a lot of variables. As you think about the longer-term leverage in the operating model as you scale and as you create this I think logistics chain that's differentiated in the kind of the broader network effect that you're building, which I also think is accelerating the competitive advantage, can you maybe talk about incremental margin potential as you kind of scale into the next phase?
And how we should think about like operating leverage and whether that will accelerate as there's greater scale and also just where we should think about that capping out as we're just kind of thinking about maybe the long model beyond the next few years?
Wesley R. Edens
Yes, I think that the example that I gave in terms of the capital we invested versus the returns it generates is a useful one. So $1 billion out, $7 billion in is kind of a development yield that broad side of the barn is the margins for the overall business.
If the $1 billion goes to $2 billion, as we actually get a bunch of organic growth and the capital stays relatively the same, then you've kind of doubled that from 15% to 30%. And list the number of infrastructure development companies on earth that have 15% to 30% development yields, I think it will be a pretty short conversation.
And so it's an extraordinary business. And as I said, I think I'm a little bit frustrated because people are very focused on, maybe just rightly so, on this quarter and this dollar and that dollar, I think that it is abundantly clear to me that we are headed to $1 billion plus in margin.
And that alone as a development yield on infrastructure is an extraordinary business. And it's one that has massive additional needs.
If you look at the energy equivalency in terms of like what people's access to energy is around the world. So energy poverty is a huge thing.
It's massive needs, and it has massive competitive natural advantages. It takes many years and many billions of dollars to get to a place where we are right now.
And so I feel like the offering of the company right now is an extraordinary one. And so it's just -- and you don't have to wait years from now and wait and see how things work out.
You can see tangibly what the results are right now, and we expect it will be for the rest of this year and then going into next year. So yes, I think development yields in the mid-teens that double that if you actually hit your kind of organic goals.
That's a simple way of thinking about it, it's kind of how I think about it, and I think that's extraordinary. So...
Devin Ryan
Okay, great. Well, thank you.
I appreciate it.
Wesley R. Edens
Great, well thanks everyone for dialing in middle of the summer. I hope everyone has a great remainder of August.
So back in the summer has come up quickly. And as I mentioned, we're definitely going to host a trip pending COVID and everything else in September.
We'd love to -- if you're interested in your host on that, talk to Josh, our Investor Relations folks, and we look forward to seeing you all soon. Thanks very much.
Operator
This concludes today's conference call. You may now disconnect.