New Fortress Energy Inc. - Quarter Report: 2019 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to__________

Commission File Number: 001-38790

New Fortress Energy LLC

(Exact Name of Registrant as Specified in its Charter)

Delaware		81-1482060
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

111 W. 19th Street, 8th Floor New York, NY		10011
(Address of principal executive offices)		(Zip code)

Registrant’s telephone number, including area code: (516) 268-7400

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Class A shares, representing limited liability company interests		“NFE”		NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☐
	Emerging growth company ☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of August 8, 2019, the registrant had 20,872,986 Class A shares and 147,058,824 Class B shares outstanding.

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GLOSSARY OF TERMS			ii

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS			iii

PART I FINANCIAL INFORMATION			5

	Item 1.	Financial Statements.	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	25
	Item 3.	Quantitative and Qualitative Disclosures About Market Risks.	35
	Item 4.	Controls and Procedures.	36

PART II OTHER INFORMATION			37

	Item 1.	Legal Proceedings.	37
	Item 1A.	Risk Factors.	37
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	70
	Item 3.	Defaults upon Senior Securities.	70
	Item 4.	Mine Safety Disclosures.	70
	Item 5.	Other Information.	70
	Item 6.	Exhibits.	71

SIGNATURES			72

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GLOSSARY OF TERMS

As commonly used in the liquefied natural gas industry, to the extent applicable and as used in this Quarterly Report on Form 10-Q (“Quarterly Report”), the terms listed below have the following meanings:

Btu	the amount of heat required to raise the temperature of one avoirdupois pound of pure water from 59 degrees Fahrenheit to 60 degrees Fahrenheit at an absolute pressure of 14.696 pounds per square inch gage

CAA	Clean Air Act

CERCLA	Comprehensive Environmental Response, Compensation and Liability Act

CWA	Clean Water Act

DOE	U.S. Department of Energy

GAAP	generally accepted accounting principles in the United States

GHG	greenhouse gases

GSA	natural gas sales agreement

Henry Hub	a natural gas pipeline hub located in Erath, Louisiana that serves as the official delivery location for futures contracts on the New York Mercantile Exchange

ISO container	International Organization of Standardization, an intermodal container

LNG	natural gas in its liquid state at or below its boiling point at or near atmospheric pressure

MMBtu	one million Btus, which corresponds to approximately 12.1 LNG gallons

MW	megawatt. We estimate 2,500 LNG gallons would be required to produce one megawatt

NGA	Natural Gas Act of 1938, as amended

non-FTA countries	countries without a free trade agreement with the United States providing for national treatment for trade in natural gas and with which trade is permitted

OPA	Oil Pollution Act

OUR	Office of Utilities Regulation (Jamaica)

PHMSA	Pipeline and Hazardous Materials Safety Administration

PPA	power purchase agreement

SSA	steam supply agreement

TBtu	one trillion Btus, which corresponds to approximately 12,100,000 LNG gallons

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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

This Quarterly Report contains forward-looking statements regarding, among other things, our plans, strategies, prospects and projections, both business and financial. All statements contained in this Quarterly Report other than historical information are forward-looking statements that involve known and unknown risks and relate to future events, our future financial performance or our projected business results. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “projects,” “targets,” “potential” or “continue” or the negative of these terms or other comparable terminology. Such forward-looking statements are necessarily 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. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include:

•	our limited operating history;

•	loss of one or more of our customers;

•	inability to procure LNG on a fixed-price basis, or otherwise to manage LNG price risks, including hedging arrangements;

•	the completion of construction on our LNG terminals, power plants or Liquefaction Facilities (as defined herein) and the terms of our construction contracts for the completion of these assets;

•	cost overruns and delays in the completion of one or more of our LNG terminals, power plants or Liquefaction Facilities, as well as difficulties in obtaining sufficient financing to pay for such costs and delays;

•	our ability to obtain additional financing to effect our strategy;

•	failure to produce or purchase sufficient amounts of LNG or natural gas at favorable prices to meet customer demand;

•	hurricanes or other natural or manmade disasters;

•	failure to obtain and maintain approvals and permits from governmental and regulatory agencies;

•	operational, regulatory, environmental, political, legal and economic risks pertaining to the construction and operation of our facilities;

•	inability to contract with suppliers and tankers to facilitate the delivery of LNG on their chartered LNG tankers;

•	cyclical or other changes in the demand for and price of LNG and natural gas;

•	failure of natural gas to be a competitive source of energy in the markets in which we operate, and seek to operate;

•	competition from third parties in our business;

•	inability to re-finance our outstanding indebtedness or implement our financing plans;

•	changes to environmental and similar laws and governmental regulations that are adverse to our operations;

•	inability to enter into favorable agreements and obtain necessary regulatory approvals;

•	the tax treatment of us or of an investment in our Class A shares;

•	a major health and safety incident relating to our business;

iii

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•	increased labor costs, and the unavailability of skilled workers or our failure to attract and retain qualified personnel; and

•	risks related to the jurisdictions in which we do, or seek to do, business, particularly Florida, Puerto Rico, Mexico, Angola, Jamaica, and other jurisdictions in the Caribbean.

All forward-looking statements speak only as of the date of this Quarterly Report. When considering forward-looking statements, you should keep in mind the risks set forth under “Item 1A. Risk Factors” and other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 (our “Annual Report”), this Quarterly Report and in our other filings with the Securities and Exchange Commission (the “SEC”). The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no duty to update these forward-looking statements, even though our situation may change in the future. Furthermore, we cannot guarantee future results, events, levels of activity, performance, projections or achievements.

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PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements.

New Fortress Energy LLC

Condensed Consolidated Balance Sheets

As of June 30, 2019 and December 31, 2018

(Unaudited, in thousands of U.S. dollars, except share amounts)

	June 30, 2019			December 31, 2018
Assets
Current assets
Cash and cash equivalents	$	200,306		$	78,301
Restricted cash		19,252			30
Receivables, net of allowances of $0 and $257, respectively		43,987			28,530
Finance leases, net		1,025			943
Inventory		19,623			15,959
Prepaid expenses and other current assets		35,231			30,017
Total current assets		319,424			153,780

Investment in equity securities		2,854			3,656
Restricted cash		38,460			22,522
Construction in progress		324,828			254,700
Property, plant and equipment, net		191,257			94,040
Finance leases, net		91,665			92,207
Deferred tax asset, net		20			185
Intangibles, net		42,008			43,057
Other non-current assets		46,361			35,255
Total assets	$	1,056,877		$	699,402

Liabilities
Current liabilities
Term loan facility	$	490,523		$	272,192
Accounts payable		16,282			43,177
Accrued liabilities		42,072			67,512
Due to affiliates		6,329			4,481
Other current liabilities		19,196			17,393
Total current liabilities		574,402			404,755

Deferred tax liability, net		214			—
Other long-term liabilities		15,121			12,000
Total liabilities		589,737			416,755

Commitments and contingences (Note 17)

Stockholders’ equity
Members’ capital, no par value, 500,000,000 shares authorized, 67,983,095 shares issued and outstanding as of December 31, 2018		—			426,741
Class A shares, 20,837,272 shares, issued and outstanding as of June 30, 2019; 0 shares issued and outstanding as of December 31, 2018		111,236			—
Class B shares, 147,058,824 shares, issued and outstanding as of June 30, 2019; 0 shares issued and outstanding as of December 31, 2018		—			—
Accumulated deficit		(31,757	)		(158,423	)
Accumulated other comprehensive (loss)		—			(11	)
Total stockholders’ equity attributable to NFE		79,479			268,307
Non-controlling interest		387,661			14,340
Total stockholders’ equity		467,140			282,647
Total liabilities and stockholders’ equity	$	1,056,877		$	699,402

The accompanying notes are an integral part of these condensed consolidated financial statements.

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New Fortress Energy LLC

Condensed Consolidated Statements of Operations and Comprehensive Loss

For the three and six months ended June 30, 2019 and 2018

(Unaudited, in thousands of U.S. dollars, except share and per share amounts)

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Revenues
Operating revenue	$	31,738		$	22,653		$	57,876		$	44,916
Other revenue		8,028			4,146			11,841			7,592
Total revenues		39,766			26,799			69,717			52,508

Operating expenses
Cost of sales		44,043			25,766			77,392			46,531
Operations and maintenance		5,403			1,907			9,902			3,751
Selling, general and administrative		32,169			15,535			81,918			27,404
Depreciation and amortization		2,110			732			3,801			1,428
Total operating expenses		83,725			43,940			173,013			79,114
Operating loss		(43,959	)		(17,141	)		(103,296	)		(26,606	)

Interest expense		6,199			1,603			9,483			3,206
Other expense (income), net		920			(199	)		(1,655	)		(167	)
Loss before taxes		(51,078	)		(18,545	)		(111,124	)		(29,645	)
Tax expense		155			280			401			93
Net loss		(51,233	)		(18,825	)		(111,525	)		(29,738	)
Net loss attributable to non-controlling interest		45,047			—			91,782			—
Net loss attributable to stockholders	$	(6,186	)	$	(18,825	)	$	(19,743	)	$	(29,738	)

Net loss per share – basic and diluted	$	(0.28	)				$	(1.09	)

Weighted average number of shares outstanding – basic and diluted		22,114,002						18,154,939

Other comprehensive loss:
Net loss	$	(51,233	)	$	(18,825	)	$	(111,525	)	$	(29,738	)
Unrealized loss (gain) on available-for-sale investment		—			196			—			(733	)
Comprehensive loss		(51,233	)		(19,021	)		(111,525	)		(29,005	)
Comprehensive loss attributable to non-controlling interest		45,047			—			91,782			—
Comprehensive loss attributable to stockholders	$	(6,186	)	$	(19,021	)	$	(19,743	)	$	(29,005	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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New Fortress Energy LLC

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the three and six months ended June 30, 2019 and 2018

(Unaudited, in thousands of U.S. dollars, except share amounts)

	Members’ Capital						Class A shares				Class B shares				Stock subscription receivable			Accumulated deficit			Accumulated other comprehensive (loss) income			Non-controlling Interest			Total stockholders’ equity
	Units			Amounts			Shares		Amount		Shares		Amount		Stock subscription receivable			Accumulated deficit			Accumulated other comprehensive (loss) income			Non-controlling Interest			Total stockholders’ equity
Balance as of December 31, 2018		67,983,095		$	426,741			—	$	—		—	$	—	$	—		$	(158,423	)	$	(11	)	$	14,340		$	282,647
Activity prior to the IPO and related organizational transactions:
Net loss		—			—			—		—		—		—		—			(7,923	)		11			(91	)		(8,003	)
Effects of the IPO and related organizational transactions:
Issuance of Class A shares in the IPO, net of underwriting discount and offering costs		—			—			20,837,272		32,136		—		—		—			—			—			235,874			268,010
Effects of the reorganization transactions		(67,983,095	)		(426,741	)		—		51,092		147,058,824		—		—			146,420			—			229,229			—
Activity subsequent to the IPO and related organizational transactions:
Net loss		—			—			—		—		—		—		—			(5,645	)		—			(46,644	)		(52,289	)
Share-based compensation expense		—			—			—		19,037		—		—		—			—			—			—			19,037
Balance as of March 31, 2019		—			—			20,837,272		102,265		147,058,824		—		—			(25,571	)		—			432,708			509,402
Net loss		—			—			—		—		—		—		—			(6,186	)		—			(45,047	)		(51,233	)
Share-based compensation expense		—			—			—		8,971		—		—		—			—			—			—			8,971
Balance as of June 30, 2019		—		$	—			20,837,272	$	111,236		147,058,824	$	—	$	—		$	(31,757	)	$	—		$	387,661		$	467,140

Balance as of December 31, 2017		65,665,037		$	406,591			—	$	—		—	$	—	$	(50,000	)	$	(80,347	)	$	2,666		$	—		$	278,910
Net loss		—			—			—		—		—		—		—			(10,913	)		—			—			(10,913	)
Other comprehensive loss		—			—			—		—		—		—		—			—			929			—			929
Capital contributions		665,843			20,150			—		—		—		—		—			—			—			—			20,150
Stock subscription receivable		1,652,215			—			—		—		—		—		50,000			—			—			—			50,000
Balance as of March 31, 2018		67,983,095			426,741			—		—		—		—		—			(91,260	)		3,595			—			339,076
Net loss		—			—			—		—		—		—		—			(18,825	)		—			—			(18,825	)
Other comprehensive loss		—			—			—		—		—		—		—			—			(196	)		—			(196	)
Balance as of June 30, 2018		67,983,095		$	426,741			—	$	—		—	$	—	$	—		$	(110,085	)	$	3,399		$	—		$	320,055

The accompanying notes are an integral part of these condensed consolidated financial statements.

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New Fortress Energy LLC

Condensed Consolidated Statements of Cash Flows

For the six months ended June 30, 2019 and 2018

(Unaudited, in thousands of U.S. dollars)

	Six Months Ended June 30,
	2019			2018
Cash flows from operating activities
Net loss	$	(111,525	)	$	(29,738	)
Adjustments for:
Amortization of deferred financing costs		2,589			339
Depreciation and amortization		4,106			1,767
Deferred taxes		379			32
Change in value of Investment in equity securities		802			—
Share-based compensation		28,008			—
Other		232			183
(Increase) in receivables		(15,211	)		(5,268	)
(Increase) in inventories		(3,664	)		(5,841	)
(Increase) Decrease in other assets		(6,865	)		6,412
Increase in accounts payable/accrued liabilities		2,553			4,863
Increase (Decrease) in amounts due to affiliates		1,848			(1,051	)
Increase in other liabilities		4,680			585
Net cash used in operating activities		(92,068	)		(27,717	)

Cash flows from investing activities
Capital expenditures		(232,348	)		(76,446	)
Principal payments received on finance lease, net		471			444
Net cash used in investing activities		(231,877	)		(76,002	)

Cash flows from financing activities
Proceeds from borrowings of debt		220,000			—
Payment of deferred financing costs		(4,400	)		(388	)
Repayment of debt		(2,500	)		(2,914	)
Proceeds from IPO		274,948			—
Payment of offering costs		(6,938	)		—
Capital contributed from Members		—			20,150
Collection of subscription receivable		—			50,000
Net cash provided by financing activities		481,110			66,848

Net increase (decrease) in cash, cash equivalents and restricted cash		157,165			(36,871	)
Cash, cash equivalents and restricted cash – beginning of period		100,853			118,331
Cash, cash equivalents and restricted cash – end of period	$	258,018		$	81,460

Supplemental disclosure of non-cash investing and financing activities:
Changes in accrued construction in progress costs and property, plant and equipment	$	(54,888	)	$	5,443

The accompanying notes are an integral part of these condensed consolidated financial statements.

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1.	Organization

New Fortress Energy LLC (“NFE,” together with its subsidiaries, the “Company”) is a Delaware limited liability company formed by New Fortress Energy Holdings LLC (“New Fortress Energy Holdings”) on August 6, 2018. The Company is engaged in providing energy and logistical services to end-users worldwide seeking to convert their operating assets from diesel or heavy fuel oil to LNG. The Company currently sources LNG from a combination of its own liquefaction facility in Miami, Florida and purchases on the open market. The Company has liquefaction and regasification operations in the United States and Jamaica.

The Company manages, analyzes and reports on its business and results of operations on the basis of one operating segment. The chief operating decision maker makes resource allocation decisions and assesses performance of the delivery of an integrated solution to our customers based on financial information presented on a consolidated basis.

2.	Significant accounting policies

The principle accounting policies adopted are set out below.

(a)	Basis of presentation and principles of consolidation

The condensed consolidated financial statements were prepared in accordance with GAAP. The accompanying unaudited interim condensed consolidated financial statements contained herein reflect all normal and recurring adjustments which are, in the opinion of management, necessary to provide a fair statement of the financial position, results of operations and cash flows of the Company for the interim periods presented. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned consolidated subsidiaries. The ownership interest of other investors in consolidated subsidiaries is recorded as a non-controlling interest. All significant intercompany transactions and balances have been eliminated on consolidation.

On February 4, 2019, the Company completed an initial public offering (“IPO”) and a series of other transactions, in which the Company issued and sold 20,000,000 Class A shares at an IPO price of $14.00 per share. The Company’s Class A shares began trading on NASDAQ Global Select Market (“NASDAQ”) under the symbol “NFE” on January 31, 2019. Net proceeds from the IPO were $257.0 million, after deducting underwriting discounts and commissions and transaction costs. These proceeds were contributed to New Fortress Intermediate LLC (“NFI”), an entity formed in conjunction with the IPO, in exchange for 20,000,000 limited liability company units in NFI (“NFI LLC Units”). In addition, New Fortress Energy Holdings contributed all of its interests in consolidated subsidiaries that comprised substantially all of its historical operations to NFI in exchange for NFI LLC Units. In connection with the IPO, New Fortress Energy Holdings also received 147,058,824 Class B shares of the Company, which is equal to the number of NFI LLC Units held by New Fortress Energy Holdings immediately following the IPO. New Fortress Energy Holdings holds a significant interest in NFE through its ownership of 147,058,824 Class B shares, representing a 88.0% voting and non-economic interest. New Fortress Energy Holdings also has an 88.0% economic interest in NFI through its ownership of 147,058,824 of NFI LLC Units. New Fortress Energy Holdings has been determined to be NFE’s predecessor for accounting purposes.

On March 1, 2019, the underwriters of the IPO exercised their option to purchase an additional 837,272 Class A shares at the IPO price of $14.00 per share, less underwriting discounts, which resulted in $11.0 million in additional net proceeds after deducting $0.7 million of underwriting discounts and commissions, such that there are 20,837,272 outstanding Class A shares. In connection with the exercise of the underwriters’ option to purchase an additional 837,272 Class A shares, NFE contributed such additional net proceeds to NFI in exchange for 837,272 NFI LLC Units.

NFE is a holding company whose sole material asset is a controlling equity interest in NFI. As the sole managing member of NFI, NFE operates and controls all of the business and affairs of NFI, and through NFI and its subsidiaries, conducts the Company’s historical business. The contribution of the assets of New Fortress Energy Holdings and net proceeds from the IPO to NFI was treated as a reorganization of entities under common control. As a result, NFE presented the condensed consolidated balances sheets and statements of operations and comprehensive loss of New Fortress Energy Holdings for all periods prior to the IPO. The Company’s financial statements also include a non-controlling interest related to the portion of NFI LLC Units not owned by NFE. Prior to the IPO, NFE had no operations and had no assets or liabilities.

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(b)	Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include relative fair value allocation between revenue and lease components of contracts with customers, total consideration and fair value of identifiable net assets related to acquisitions and fair value of equity awards granted to both employees and non-employees. Management evaluates its estimates and related assumptions regularly. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates.

(c)	Investment in equity securities

The Company holds an investment in equity securities. The investment is carried at fair value with gains or losses recorded in earnings in Other expense (income), net in the condensed consolidated statements of operations and comprehensive loss. See “Note 8. Investment in equity securities” for more information.

(d)	Legal and contingencies

The Company may be involved in legal actions in the ordinary course of business, including governmental and administrative investigations, inquiries and proceedings concerning employment, labor, environmental and other claims. The Company will recognize a loss contingency in the condensed consolidated financial statements when it is probable a liability has been incurred and the amount of the loss can be reasonably estimated. The Company will disclose any loss contingencies that do not meet both conditions if there is a reasonable possibility that a loss may have been incurred. Gain contingencies are not recorded until they are realized.

(e)	Revenue recognition

The Company’s primary revenue stream is the sale of LNG and natural gas to its customers, which is presented as Operating revenue in the condensed consolidated statements of operations and comprehensive loss. Natural gas or LNG is delivered either by pipeline into the customer’s power generation facilities or in containers delivered by truck to customer sites, respectively. Revenues from sales delivered by pipeline to a power generation facility are recognized over time under the output method, as the customer takes control of the natural gas. Revenues from sales delivered by truck are recognized at the point in time at which legal title, physical possession and the risks and rewards of ownership transfer to the customer. Title typically transfers either when the containers are shipped or delivered to the customers’ storage facilities, depending on the terms of the contract. Because the nature, timing and uncertainty of revenues and cash flows are substantially the same under both modes of delivery, we have presented revenue on an aggregated basis.

The Company has concluded that variable consideration included in these agreements meets the exception for allocating variable consideration. As such, the variable consideration for these contracts is allocated to each distinct unit of LNG or natural gas delivered and recognized when that distinct unit of LNG or natural gas is delivered to the customer.

The Company’s contracts with customers to supply natural gas or LNG may contain a lease of equipment. The Company allocates consideration received from customers between lease and non-lease components based on the relative fair value of each component. The fair value of the lease component is estimated based on the market value of the same or similar equipment leased to the customer. The Company estimates the fair value of the non-lease component by forecasting volumes and pricing of gas to be delivered to the customer over the lease term.

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The leases of certain facilities and equipment to customers are accounted for as direct financing or operating leases. Direct financing leases, net represents the minimum lease payments due, net of unearned revenue. The lease payments are segregated into principal and interest components similar to a loan. Unearned revenue is recognized on an effective interest method over the lease term and included in Other revenue in the condensed consolidated statements of operations and comprehensive loss. The principal components of the lease payment are reflected as a reduction to the net investment in the finance lease. For the Company’s operating leases, the amount allocated to the leasing component is recognized over the lease term as Other revenue in the condensed consolidated statements of operations and comprehensive loss.

Shipping and handling costs are not considered to be separate performance obligations. These costs are expensed in the period in which they are incurred and presented within Cost of sales in the condensed consolidated statements of operations and comprehensive loss. All such shipping and handling activities are performed prior to the customer obtaining control of the LNG or natural gas.

The Company collects sales taxes from its customers on sales of taxable products and remits such collections to the appropriate taxing authority. The Company has elected to present sales tax collections in the condensed consolidated statements of operations and comprehensive loss on a net basis and, accordingly, such taxes are excluded from reported revenues.

The Company elected the practical expedient under which the Company does not adjust consideration for the effects of a significant financing component for those contracts where the Company expects at contract inception that the period between transferring goods to the customer and receiving payment from the customer will be one year or less.

(f)	Share-based compensation

In connection with the IPO, the Company adopted the New Fortress Energy LLC 2019 Omnibus Incentive Plan (the “Incentive Plan”), effective as of February 4, 2019. Under the Incentive Plan, the Company may issue options, stock appreciation rights, restricted shares, restricted stock units (“RSUs”), share bonuses or other share-based awards to selected officers, employees, non-employee directors and select non-employees of NFE or its affiliates. The Company accounts for share-based compensation in accordance with Accounting Standards Codification (“ASC”) 718, Compensation – Stock Compensation, and ASC 505, Equity, which require all share-based payments to employees and members of the board of directors to be recognized as expense in the condensed consolidated financial statements based on their fair values. The Company has elected not to estimate forfeitures of its share-based compensation awards but will recognize the reversal in compensation expense in the period in which the forfeiture occurs. Upon creation of the Incentive Plan, the Company early adopted Accounting Standards Update (“ASU”) 2018-07 (as defined below). See “Note 3(b). Adoption of new and revised standards – New and amended standards adopted by the Company” for additional information related to ASU 2018-07 and “Note 19. Share-based compensation” for additional information related to share-based compensation.

(g)	Income taxes

In conjunction with the closing of the Company’s IPO, New Fortress Energy Holdings contributed all of its interests in consolidated subsidiaries that comprised substantially all of its historical operations to NFI in exchange for NFI LLC Units. NFE has elected to be taxed as a corporation and is subject to U.S. federal and state income taxes.

The Company accounts for income taxes in accordance with ASC 740, “Accounting for Income Taxes” (“ASC 740”), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse. Such net tax effects on temporary differences are reflected on the Company’s condensed consolidated balance sheets as deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when the Company believes that it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.

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ASC 740 prescribes a two-step approach for the recognition and measurement of tax benefits associated with the positions taken or expected to be taken in a tax return that affect amounts reported in the financial statements. The Company has reviewed and will continue to review the conclusions reached regarding uncertain tax positions, which may be subject to review and adjustment at a later date based on ongoing analyses of tax laws, regulations and interpretations thereof. To the extent that the Company’s assessment of the conclusions reached regarding uncertain tax positions changes as a result of the evaluation of new information, such change in estimate will be recorded in the period in which such determination is made. The Company reports income tax-related interest and penalties relating to uncertain tax positions, if applicable, as a component of income tax expense.

(h)	Net loss per share

Basic EPS is computed by dividing net loss attributable to Class A shares by the weighted average number of Class A shares outstanding during the period following the reorganization. Class B shares represent non-economic interests in the Company and, as such, earnings are not allocated to Class B shares.

Diluted EPS reflects potential dilution and is computed by dividing net loss attributable to Class A shares by the weighted average number of Class A shares outstanding during the period following the reorganization increased by the number of additional Class A shares that would have been outstanding, including NFI LLC Units convertible into Class A shares and unvested RSUs. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per share by application of the treasury stock method or if-converted method, as applicable. Refer to “Note 18. Earnings Per Share” for additional information.

Please refer to “Note 2. Significant accounting policies,” to our consolidated financial statements from our Annual Report on Form 10-K for the discussion of our significant accounting policies.

3.	Adoption of new and revised standards

As an “emerging growth company,” the Jumpstart Our Business Startups Act (“JOBS Act”) allows the Company to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. The Company has elected to use this extended transition period under the JOBS Act. The adoption dates discussed below reflect this election.

a)	New standards, amendments and interpretations issued but not effective for the financial year beginning January 1, 2019:

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (“ASU 2016-02”). ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheet and making targeted changes to lessor accounting. ASU 2016-02 will be effective for annual reporting periods beginning after December 15, 2019, and interim periods beginning after December 15, 2020, with early adoption permitted. The Company will adopt this guidance for the year beginning January 1, 2020 and is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Disclosure Framework – Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires financial assets measured at amortized cost basis, including trade receivables, to be presented net of the amount expected to be collected. The measurement of all expected credit losses will be based on historical experience, current conditions, and reasonable and supportable forecasts. The Company will adopt ASU 2016-13 for the year beginning January 1, 2021 and is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which provides additional guidance to improve the effectiveness of disclosure requirements on fair value measurement. The Company will adopt ASU 2018-13 for the year beginning January 1, 2020 and is currently evaluating the impact of adopting this new guidance on its consolidated financial statements.

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In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. A customer’s accounting for the costs of the hosting component of the arrangement is not affected by the new guidance. This ASU is effective for the Company on January 1, 2021, with early adoption permitted. The Company is currently evaluating the impact of adopting this new guidance on its consolidated financial statements and the timing of adoption.

b)	New and amended standards adopted by the Company:

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”) which provides a single comprehensive model for recognizing revenue from contracts with customers and supersedes existing revenue recognition guidance. The new standard requires that a company recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the company expects to receive in exchange for those goods or services. The Company adopted ASC 606 on January 1, 2019 using the modified retrospective method, which required the Company to apply the new revenue standard to (i) all new revenue contracts entered into after January 1, 2019 and (ii) all existing revenue contracts as of January 1, 2019 through a cumulative adjustment to our retained earnings balance. The adoption of ASC 606 did not have any impact on the Company’s historical retained earnings.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which makes targeted improvements to the accounting for, and presentation and disclosure of, financial instruments. ASU 2016-01 requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income. ASU 2016-01 does not affect the accounting for investments that would otherwise be consolidated or accounted for under the equity method. The new standard also impacts financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The Company has adopted this guidance for the year beginning January 1, 2019 by recognizing an immaterial adjustment to beginning retained earnings for the net unrealized gains/losses on equity investments with readily determinable fair values.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provides guidance on eight specific cash flow issues with an intention to reduce the existing diversity in practice. The Company has adopted this guidance for the year beginning January 1, 2019, and its adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that statements of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash and restricted cash equivalents. This change is intended to limit the diversity in practice in the treatment of restricted cash in the statement of cash flows. The adoption of this standard resulted in the Company no longer showing the changes in restricted cash balances as a component of cash flows from investing or financing activities but instead including the balances of both current and long-term restricted cash with cash and cash equivalents in total cash, cash equivalents and restricted cash for the beginning and end of the periods presented. The Company has adopted this guidance for the year beginning January 1, 2019.

In February 2018, the FASB issued ASU 2018-02, Income Statement: Reporting Comprehensive Income (Topic 220) which allows a reclassification from accumulated other comprehensive income (loss) to retained earnings for tax effects resulting from the comprehensive tax legislation enacted by the U.S. government commonly referred to as the Tax Cuts and Jobs Act. The Company has adopted this guidance for the year beginning January 1, 2019. The Company had no tax impacts recorded in accumulated other comprehensive income (loss) prior to adoption of the standard, and therefore adoption of the standard had no impact on the Company’s condensed consolidated financial statements.

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In September 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation Improvements to Non-employee Share-Based Payment Accounting (“ASU 2018-07”), which simplifies the accounting for share-based payments granted to non-employees for goods and services. Under ASU 2018-07, most of the guidance on such payments to non-employees will be aligned with the requirements for share-based payments granted to employees. The Company has early adopted ASU 2018-07 upon inception of the Incentive Plan, and its adoption did not have a material impact on the Company’s condensed consolidated financial statements.

4.	Revenue from contracts with customers

Revenue recognized in the Company’s condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019 and any associated balances on the condensed consolidated balance sheet as of June 30, 2019 prepared under ASC 606 did not differ materially from what would have been presented under the previous revenue standard. As such, no comparison for the results of operations for the three and six months ended June 30, 2019 and the financial position as of June 30, 2019 under ASC 606 and ASC 605 has been presented.

Under most customer contracts, invoicing occurs once the Company’s performance obligations have been satisfied, at which point payment is unconditional. Receivables related to revenue from contracts with customers totaled $31,562 as of June 30, 2019 and were included in “Receivables, net” on the condensed consolidated balance sheets, net of the allowance for doubtful accounts. Other items included in Receivables, net not related to revenue from contracts with customers represent receivables associated with leases which are accounted for outside the scope of ASC 606.

During the six month period ended June 30, 2019, the Company recognized a contract liability of $973. The contract liability balance is comprised of unconditional payments due under the contract with a customer prior to the Company’s satisfaction of the related performance obligations. The performance obligations are expected to be recognized during the next 12 months, and the contract liability is classified within Other current liabilities on the condensed consolidated balance sheets. Contract assets or liabilities have not been previously recognized, and as such, there are no other changes to contract balances within the current period.

Transaction price allocated to remaining performance obligations

Some of the Company’s contracts are short-term in nature with a contract term of less than a year. The Company applied the optional exemption not to report any unfulfilled performance obligations related to these contracts.

The Company has arrangements in which LNG or natural gas is sold on a “take-or-pay” basis whereby the customer is obligated to pay for the minimum guaranteed volumes even if it does not take delivery of them. The price under these agreements is based on a market index plus a fixed margin. The fixed transaction price allocated to the remaining performance obligations under these arrangements is $3,119,776 as of June 30, 2019, representing the fixed margin multiplied by the outstanding minimum guaranteed volumes. The Company expects to recognize this revenue over the following time periods. The pattern of recognition reflects the minimum guaranteed volumes in each period:

Period	Revenue
Remainder 2019	$	58,981
2020		159,053
2021		164,789
2022		164,645
2023		164,724
Thereafter		2,407,584
Total	$	3,119,776

For all other sales contracts that have a term exceeding one year, the Company has elected the practical expedient in ASC 606-10-50-14A under which the Company does not disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. For these excluded contracts, the sources of variability are (a) the fluctuating market index prices of natural gas used to price the contracts, and (b) the variation in volumes that may be delivered to the customer. Both sources of variability are expected to be resolved at or shortly before delivery of each unit of LNG or natural gas. As each unit of LNG or natural gas represents a separate performance obligation, future volumes are wholly unsatisfied.

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During the six month period ended June 30, 2019, the Company began to incur costs to fulfill a contract with a significant customer. These costs primarily consist of expenses required to enhance resources to deliver under the agreement with the customer. Such costs are capitalized as incurred within Other non-current assets on the condensed consolidated balance sheets. As of June 30, 2019, the Company has capitalized $3,335, and these costs will be recognized over the expected customer life, beginning when the Company begins to deliver under the contract.

5.	Fair value

Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized as follows:

•

Level 1 – observable inputs such as quoted prices in active markets for identical assets or liabilities.

•

Level 2 – inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.

•

Level 3 – unobservable inputs for which there is little or no market data and which require the Company to develop its own assumptions about how market participants price the asset or liability.

The valuation techniques that may be used to measure fair value are as follows:

•

Market approach – uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

•

Income approach – uses valuation techniques, such as discounted cash flow technique, to convert future amounts to a single present amount based on current market expectations about those future amounts.

•

Cost approach – based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

The following table presents the Company’s financial assets and financial liabilities that are measured at fair value as of June 30, 2019:

	June 30, 2019
	Level 1		Level 2		Level 3		Total		Valuation technique
Assets
Cash and cash equivalents	$	200,306	$	—	$	—	$	200,306	Market approach
Restricted cash		57,712		—		—		57,712	Market approach
Investment in equity securities		2,854		—		—		2,854	Market approach
Total	$	260,872	$	—	$	—	$	260,872

Liabilities
Derivative liability⁽¹⁾	$	—	$	—	$	9,937	$	9,937	Income approach
Equity agreement⁽²⁾		—		—		16,667		16,667	Income approach
Total	$	—	$	—	$	26,604	$	26,604

(1)

Consideration due to the sellers of Shannon LNG (as defined in “Note 11. Intangible Assets” below) once first gas is supplied from the terminal to be built.

(2)

To be paid in shares at the earlier of agreed-upon date in 2020 or the commencement of significant construction activities specified in the Shannon LNG Agreement.

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The following table presents the Company’s financial assets and financial liabilities that are measured at fair value as of December 31, 2018:

	December 31, 2018
	Level 1		Level 2		Level 3		Total		Valuation technique
Assets
Cash and cash equivalents	$	78,301	$	—	$	—	$	78,301	Market approach
Restricted cash		22,552		—		—		22,552	Market approach
Investment in equity securities		3,656		—		—		3,656	Market approach
Total	$	104,509	$	—	$	—	$	104,509

Liabilities
Derivative liability	$	—	$	—	$	9,835	$	9,835	Income approach
Equity agreement		—		—		16,924		16,924	Income approach
Total	$	—	$	—	$	26,759	$	26,759

The Company estimates fair value of the derivative liability and equity agreement using a discounted cash flows method with discount rates based on the average yield curve for bonds with similar credit ratings and matching terms to the discount periods as well as a probability of the contingent event occurring. The Company recorded a total loss/(gain) from fair value adjustment on the derivative liability and equity agreement of $478 and $(155) within Other expense (income), net in the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019, respectively. During the three and six months ended June 30, 2019, the Company had no settlements of the equity agreement or derivative liability or any transfers in or out of Level 3 in the fair value hierarchy.

The Company estimates fair value of outstanding debt using a discounted cash flow method based on current market interest rates for debt issuances with similar remaining years to maturity and adjusted for credit risk. The Company has estimated that the carrying value of the New Term Loan Facility (defined below) approximates fair value. The fair value estimate is classified as Level 3 in the fair value hierarchy.

6.	Restricted cash

As of June 30, 2019 and December 31, 2018, restricted cash consisted of the following:

	June 30, 2019		December 31, 2018
Collateral for performance under customer agreements	$	15,126	$	15,095
Collateral for LNG purchases		35,000		927
Collateral for letters of credit		7,297		6,238
Other restricted cash		289		292
Total restricted cash	$	57,712	$	22,552
Current restricted cash	$	19,252	$	30
Non-current restricted cash		38,460		22,522

Inventory

As of June 30, 2019 and December 31, 2018, inventory consisted of the following:

	June 30, 2019		December 31, 2018
LNG and natural gas inventory	$	19,010	$	15,611
Materials, supplies and other		613		348
Total	$	19,623	$	15,959

Inventory is adjusted to the lower of cost or net realizable value each quarter. Changes in the value of inventory are recorded within Cost of sales in the condensed consolidated statements of operations and comprehensive loss. No adjustments were recorded during the three and six months ended June 30, 2019 and 2018, respectively.

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8.	Investment in equity securities

The Company has invested in equity securities of an international oil and gas drilling contractor. The following tables present the number of shares, cost and fair value of the investment:

	June 30, 2019
(in thousands of U.S. dollars except shares)	Number of Shares		Cost		Fair value
Investment in equity securities⁽¹⁾		295,256	$	3,667	$	2,854

	December 31, 2018
(in thousands of U.S. dollars except shares)	Number of Shares		Cost		Fair value
Investment in equity securities		1,476,280	$	3,667	$	3,656

(1)

During the six months ended June 30, 2019, the investee effected a 5-for-1 reverse stock split.

The movement of the equity investment during the six months ended June 30, 2019 is summarized below:

	June 30, 2019
Beginning of period	$	3,656
Unrealized gain/(loss)		(802	)
End of period	$	2,854

The unrealized loss of $1,698 and $802 for the three and six months ended June 30, 2019, respectively is included within Other expense (income), net in the condensed consolidated statements of operations and comprehensive loss.

9.	Construction in progress

The Company’s construction in progress activity during the six months ended June 30, 2019 is detailed below:

	June 30, 2019
Balance at beginning of period	$	254,700
Additions		168,101
Transferred to property, plant and equipment, net (Note 10)		(97,973	)
Balance at end of period	$	324,828

Interest expense of $9,111 and $0 was capitalized for the six months ended June 30, 2019 and 2018, respectively, inclusive of amortized debt issuance costs disclosed in “Note 15. Debt.”

10.	Property, plant and equipment, net

As of June 30, 2019 and December 31, 2018 the Company’s property, plant and equipment, net consisted of the following:

	June 30, 2019			December 31, 2018
LNG liquefaction facilities	$	66,526		$	65,631
Gas terminals		59,453			—
Gas pipelines		30,658			—
ISO containers and other equipment		20,773			15,873
Land		16,588			12,779
Leasehold improvements		8,054			7,229
Vehicles		1,329			1,178
Computer equipment		846			741
Accumulated depreciation		(12,970	)		(9,391	)
Total property, plant and equipment, net	$	191,257		$	94,040

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Depreciation for the three months ended June 30, 2019 and 2018 totaled $1,983 and $910, respectively, of which $147 and $178 is respectively included within Cost of sales in the condensed consolidated statements of operations and comprehensive loss. Depreciation for the six months ended June 30, 2019 and 2018 totaled $3,563 and $1,767, respectively, of which $305 and $339 is respectively included within Cost of sales in the condensed consolidated statements of operations and comprehensive loss.

11.	Intangible assets

On November 9, 2018, the Company entered into an agreement to acquire the entire issued share capital of Shannon LNG Limited and Shannon LNG Energy Limited (together, “Shannon LNG”). Shannon LNG was previously formed to construct and operate a terminal, pipeline and related infrastructure in order to deliver natural gas to downstream customers in Ireland. In connection with the acquisition, the Company recognized intangible assets related to favorable lease agreements and permits.

The following table summarizes the composition of intangible assets as of June 30, 2019 and December 31, 2018:

	June 30, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Useful Life
Shannon LNG leases and permits	$	42,685	$	677	$	42,008	40 to 91
Total intangible assets	$	42,685	$	677	$	42,008

	December 31, 2018
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Useful Life
Shannon LNG leases and permits	$	43,191	$	134	$	43,057	40 to 91
Total intangible assets	$	43,191	$	134	$	43,057

As of June 30, 2019, the weighted-average remaining amortization periods for the intangible assets is 39.63 years. Amortization for the three and six months ended June 30, 2019 totaled $274 and $543, respectively.

12.	Finance leases, net

The Company placed its storage and regasification LNG terminal in Montego Bay, Jamaica into service on October 30, 2016, which has been accounted for as a direct finance lease. In addition, the Company has also entered into other arrangements to lease equipment to customers which are accounted for as direct finance leases. The components of the direct finance leases as of June 30, 2019 and December 31, 2018 are as follows:

	June 30, 2019			December 31, 2018
Finance leases	$	298,904		$	306,832
Unearned income		(206,214	)		(213,682	)
Total finance leases, net	$	92,690		$	93,150
Current portion	$	1,025		$	943
Non-current		91,665			92,207

Receivables related to the Company’s direct finance leases are primarily with a public utility that generates consistent cash flow. Therefore, the Company does not expect a material impact to the results of operations or financial position due to nonperformance from such counterparty.

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13.	Other non-current assets

As of June 30, 2019 and December 31, 2018, other non-current assets consisted of the following:

	June 30, 2019		December 31, 2018
Easements	$	1,446	$	1,159
Port access rights		12,206		12,671
Initial lease costs		8,702		9,200
Nonrefundable deposit		10,970		10,810
Upfront payments to customers		6,329		—
Other		6,708		1,415
Total other non-current assets	$	46,361	$	35,255

Port access rights related to the Company’s port lease in Baja California Sur, Mexico, represent capitalized initial direct costs of entering the lease and are amortized straight-line over the lease term as additional rent expense. Initial lease costs represent capitalized payments made to previous lessees to secure the Company’s port lease in San Juan, Puerto Rico, and are also amortized straight-line over the lease term. Nonrefundable deposits are primarily related to deposits for planned land purchases in Pennsylvania and Ireland.

Upfront payments to customers consist of amounts the Company has paid in relation to two natural gas sales contracts with customers. Under these agreements, the Company has made payments of $5,000 and is obligated to make an additional payment of $1,350 to the customers in order to construct fuel-delivery infrastructure that the customers will own.

14.	Accrued liabilities

As of June 30, 2019 and December 31, 2018 accrued liabilities consisted of the following:

	June 30, 2019		December 31, 2018
Accrued construction costs	$	16,870	$	41,343
Accrued IPO costs		—		5,296
Accrued vessel charter costs		2,160		—
Accrued bonuses		10,600		12,582
Other accrued expenses		12,442		8,291
Total	$	42,072	$	67,512

15.

Debt

As of June 30, 2019 and December 31, 2018, the Company’s current debt consisted of the New Term Loan Facility and the Term Loan Facility (as defined below) with balances of $490,523 and $272,192, respectively.

New Term Loan Facility

On August 16, 2018, the Company entered into a Term Loan Facility (the “Term Loan Facility”). On December 31, 2018, the Company amended its previous Term Loan Facility to borrow up to an aggregate principal amount of $500,000 (the “New Term Loan Facility”) from a syndicate of two lenders. The Company initially borrowed $280,000 under the New Term Loan Facility. On March 21, 2019, the Company drew an additional $220,000 under the New Term Loan Facility, bringing the Company’s total outstanding borrowings to $500,000 under the New Term Loan Facility.

All borrowings under the New Term Loan Facility bear interest at a rate selected by the Company of either (i) the LIBOR divided by one minus the applicable reserve requirement plus a spread of 4.0% or (ii) subject to a floor of 1.0%, a Base Rate equal to the higher of (a) the Prime Rate, (b) the Federal Funds Rate plus 1⁄2 of 1.0% or (c) the 1-month LIBOR rate plus 1.0% plus a spread of 3.0%. The New Term Loan Facility is set to mature on December 31, 2019 and is repayable in quarterly installments of $1,250, with a balloon payment due at maturity. The Company has the option to extend the maturity date for two additional six-month periods; upon the exercise of each extension option, the spread on LIBOR and Base Rate increases by 0.5%. To exercise the extension option, the Company must pay a fee equal to 1.0% of the outstanding principal balance at the time of the exercise of the option.

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The New Term Loan Facility is secured by mortgages on certain properties owned by the Company’s subsidiaries, in addition to other collateral. The Company is required to comply with certain financial covenants and other restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. The New Term Loan Facility also provides for customary events of default, prepayment and cure provisions.

The Company paid $4,400 of additional fees in connection with the $220,000 draw on the New Term Loan Facility. These fees were capitalized as a reduction to the New Term Loan Facility on the condensed consolidated balance sheets. The total unamortized deferred financing costs as of June 30, 2019 was $6,977.

Interest and related amortization of debt issuance costs recognized during major development and construction projects are capitalized and included in the cost of the project. Amortization of debt issuance costs were $3,166 and $165 for the three months ended June 30, 2019 and 2018, respectively, of which $1,558 and $0 were capitalized, respectively, and $5,230 and $339 for the six months ended June 30, 2019 and 2018, respectively, of which $2,641 and $0 were capitalized, respectively.

16.	Income taxes

In connection with the IPO, NFE contributed the net proceeds from the IPO to NFI in exchange for NFI LLC Units, and NFE became the managing member of NFI. NFI is a limited liability company that is treated as a partnership for U.S. federal income tax purposes and for most applicable state and local income tax purposes. As a partnership, NFI is not subject to U.S. federal and certain state and local income taxes. Any taxable income or loss generated by NFI is passed through to and included in the taxable income or loss of its members, including NFE, on a pro rata basis, subject to applicable tax regulations. NFE is subject to U.S. federal income taxes, in addition to state and local income taxes, with respect to its allocable share of any taxable income or loss of NFI. Additionally, NFI and its subsidiaries are subject to income taxes in the various foreign jurisdictions in which they operate.

In connection with the IPO, NFE recorded a deferred tax asset related to the differential between its outside basis in its investment in NFI and NFE’s share of the basis of the assets of NFI, which was $44,473 at February 4, 2019.

The Company records a valuation allowance against its deferred tax assets to reduce the net carrying value to an amount that it believes is more likely than not to be realized. As of June 30, 2019, the Company concluded, based on the weight of all available positive and negative evidence, those deferred tax assets recorded as part of the IPO are not more likely than not to be realized and accordingly, a full valuation allowance has been recorded on this deferred tax asset as of June 30, 2019.

Jamaica

NFI’s subsidiaries incorporated in Jamaica are subject to income tax which is computed at 25% of the relevant subsidiaries’ results for the year, adjusted for tax purposes.

Bermuda

NFI has subsidiaries incorporated in Bermuda. Under current Bermuda law, the Company is not required to pay taxes in Bermuda on either income or capital gains. The Company has received an undertaking from the Bermuda government that, in the event of income or capital gain taxes being imposed, it will be exempted from such taxes until 2035.

Ireland

NFI acquired Shannon LNG on November 9, 2018. The Shannon LNG entities are incorporated in Ireland and had net operating loss carryforwards of approximately $41,395 as of the acquisition date. These losses were evaluated to determine if any would be subject to a limitation resulting from the acquisition. The Company concluded, based on the weight of all available positive and negative evidence, those deferred tax assets relating to the net operating loss carryforwards are not more likely than not to be realized and accordingly, a full valuation allowance has been recorded on these deferred tax assets as of June 30, 2019.

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Puerto Rico

NFI has a subsidiary, NFEnergia LLC (NFEnergia) incorporated in Puerto Rico. NFEnergia is treated as a controlled foreign coporation for U.S. federal income tax purposes. The entity has not yet begun operations in Puerto Rico and has been in a loss position since it was organized in 2017. A full valuation allowance has been recorded against deferred tax assets related to those losses as of June 30, 2019.

Total Operations

The effective tax rate for the three months ended June 30, 2019 and June 30, 2018 was (0.30)% and (1.51)%, respectively. The total tax expense for the three months ended June 30, 2019 and 2018 was $155 and $280, respectively.

The effective tax rate for the six months ended June 30, 2019 and June 30, 2018 was (0.36)% and (0.31)%, respectively. The total tax expense for the six months ended June 30, 2019 and 2018 was $401 and $93, respectively.

The Company has not recorded a liability for uncertain tax positions as of June 30, 2019. The Company remains subject to periodic audits and reviews by the taxing authorities, and NFE’s returns since its formation remain open for examination.

17.	Commitments and contingencies

Contingencies

As of December 31, 2016, the Company had accrued for $1,204 of tangible personal property tax levied in the State of Florida with respect to the Company’s LNG plant in Hialeah, Florida. During 2017, the Company paid this amount in full and subsequently initiated legal proceedings to challenge the tax amount for a full or partial rebate. The Company successfully challenged the tax amount, including penalties, and received a full rebate. The State of Florida has appealed the determination and the Company repaid the rebate amount in order to avoid penalties and charges while the appeal is under consideration.

As of the date at which these condensed consolidated financial statements were issued, the appeal has not been concluded. Should the State of Florida lose the appeal, the Company expects a full refund which will be recognized as a gain contingency recognized in earnings when the cash is received.

18.	Earnings per share

	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019
Numerator:
Net loss	$	(51,233	)	$	(111,525	)
Less: net loss attributable to non-controlling interests		45,047			91,782
Net loss attributable to Class A shares	$	(6,186	)	$	(19,743	)
Denominator:
Weighted-average shares - basic and diluted		22,114,002			18,154,939
Net loss per share - basic and diluted	$	(0.28	)	$	(1.09	)

In connection with the IPO, New Fortress Energy Holdings, the Company’s predecessor, effected a one-for-2.16 stock split of its issued and outstanding common shares, resulting in 147,058,824 common shares. Upon the reorganization, New Fortress Energy Holdings obtained the same number of Class B shares in NFE. Class B shares do not share in the earnings or losses of the Company and are therefore not participating securities. As such, separate presentation of basic and diluted net loss per share for Class B shares under the two-class method has not been presented.

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The following table presents potentially dilutive securities excluded from the computation of diluted net loss per share for the periods presented because its effects would have been anti-dilutive.

	June 30, 2019
Unvested RSUs⁽¹⁾		3,959,725
Class B shares⁽²⁾		147,058,824
Shannon Equity Agreement shares⁽³⁾		1,432,208
Total		152,450,757

(1)

Represents the number of instruments outstanding at the end of the period.

(2)

Class B shares at the end of the period are considered potentially dilutive Class A shares under application of the if-converted method.

(3)

Class A shares that would be issued in relation to the Shannon LNG Equity agreement.

19.	Share-based compensation

During the six months ended June 30, 2019, the Company granted RSUs to select officers, employees, non-employee members of the board of directors, and select non-employees under the Incentive Plan.

The Company estimates the fair value of RSUs on the grant date based on the closing price of the underlying shares on the grant date and other fair value adjustments to account for a post-vesting holding period. These fair value adjustments were estimated based on the Finnerty model.

For the six months ended June 30, 2019, cumulative compensation expense recognized for forfeited awards of $56 was reversed.

The following table summarizes the RSU activity for the six months ended June 30, 2019:

	Restricted Stock Units			Weighted- average grant date fair value per share
Non-vested RSUs as of December 31, 2018		—		$	—
Granted		5,404,823			13.48
Vested and shares issued		(1,284,383	)		13.53
Forfeited		(160,715	)		13.51
Non-vested RSUs as of June 30, 2019		3,959,725		$	13.46

During the six months ended June 30, 2019, the Company recognized a compensation expense of $28,008, of which $27,679 and $329 are recorded in Selling, general and administrative and Operations and maintenance, respectively. During the three months ended June 30, 2019, the Company recognized a compensation expense of $8,971, of which $8,711 and $260 are recorded in Selling, general and administrative and Operations and maintenance, respectively. The Company recognizes the income tax benefits resulting from vesting of RSUs in the period they vest, to the extent the compensation expense has been recognized.

As of June 30, 2019, the Company had 3,959,725 non-vested RSUs subject to service conditions and therefore had unrecognized compensation costs of approximately $42,629. The non-vested RSUs will vest over a period from ten months to three years following the grant date. The weighted-average remaining vesting period of non-vested RSUs totaled 1.53 years as of June 30, 2019.

20.	Leases, as lessee

During the three months ended June 30, 2019 and 2018, the Company recognized rental expense for all operating leases of $8,939 and $6,810 respectively. During the six months ended June 30, 2019 and 2018, the Company recognized rental expense for all operating leases of $17,376 and $11,295 respectively related primarily to LNG vessel time charters, office space, a land site lease and marine port berth leases as detailed in the table below.

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Lease	Term	Rent Escalation

Land site lease¹	5 year initial term; 5 year renewal option	2.5% per annum

Marine port berth lease	10 year initial term; annual renewal option for up to 10 years	15% after year 5

Marine port berth lease	20 year initial term; no renewal option	No escalation

LNG vessel time charter	24 month initial term; 3 month renewal option	No escalation

LNG vessel time charter	7 year initial term; no renewal option	2% per annum after year 3

LNG vessel time charter	15 year initial term; non-cancellable for the first 3 years; 5 year renewal option	No escalation

Office space lease	7 year initial term; two 5-year renewal options	3% per annum

Office space lease	1 year renewal option	5% per annum

Refer to “Note 21. Related party transactions” for additional detail.

21.	Related party transactions

Management and administrative services

In the ordinary course of business, Fortress Investment Group LLC (“Fortress”), through affiliated entities, has historically charged the Company for administrative and general expenses incurred pursuant to its Management Services Agreement (“Management Agreement”). Upon completion of the IPO, the Management Agreement was terminated and replaced by an Administrative Services Agreement (“Administrative Agreement”) to charge the Company for similar administrative and general expenses. The charges under the Management Agreement and Administrative Agreement that are attributable to the Company totaled $1,742 and $377 for the three months ended June 30, 2019 and 2018, respectively and $4,520 and $724 for the six months ended June 30, 2019 and 2018, respectively. Costs associated with the Management Agreement and Administrative Agreement are included within Selling, general and administrative in the condensed consolidated statements of operations and comprehensive loss.

In addition to management and administrative services, an affiliate of Fortress owns and leases an aircraft chartered by the Company for business purposes in the course of operations. The Company incurred, at aircraft operator market rates, charter costs of $649 and $358 for the three months ended June 30, 2019 and 2018, respectively and charter costs of $1,625 and $591 for the six months ended June 30, 2019 and 2018, respectively.

As of June 30, 2019 and December 31, 2018, $5,707 and $3,579 were due to Fortress, respectively.

Land and office lease

The Company has historically leased land and office space from Florida East Coast Industries, LLC (“FECI”), an affiliate of the Company. In April 2019, FECI sold the office building to a non-affiliate, and as such, the lease of the office space is now no longer held with a related party. The expense for the period that the land and building was owned by a related party during the three months ended June 30, 2019 and 2018 totaled $112 and $71, respectively, of which $38 and $0 related to the office lease and ancillary services is included in Selling, general and administrative, and $74 and $71 related to the land lease is included within Operations and maintenance, respectively. The expense for the period that the land and building was owned by a related party during the six months ended June 30, 2019 and 2018 totaled $758 and $117, respectively, of which $386 and $0 was capitalized to Construction in progress, $223 and $0 related to the office lease and ancillary services is included in Selling, general and administrative, and $149 and $117 related to the land lease is included within Operations and maintenance, respectively in the condensed consolidated statements of operations and comprehensive loss. As of June 30, 2019 and December 31, 2018, $0 and $597 were due to FECI, respectively.

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DevTech Investment

In August 2018, the Company entered into a consulting arrangement with DevTech Environment Limited (“DevTech”), to provide business development services to increase the customer base of the Company. DevTech also contributed cash consideration in exchange for a 10% interest in a consolidated subsidiary. The 10% interest is reflected as non-controlling interest in the Company’s condensed consolidated financial statements. DevTech also purchased 10% of a note payable due to an affiliate of the Company. As of June 30, 2019 and December 31, 2018, $1,073 and $755 was owed to DevTech on the note payable, respectively. The outstanding note payable due to DevTech is included in Other long-term liabilities in the condensed consolidated balance sheet as of June 30, 2019. For the three and six months ended June 30, 2019, interest expense on the note payable due to DevTech was $24 and $46, respectively. As of June 30, 2019 and December 31, 2018, $665 and $365 was due from DevTech, respectively.

Fortress affiliated entities

Since 2017, the Company has provided certain administrative services to related parties including Fortress Energy Partners that is billed on a yearly basis. As of June 30, 2019 and December 31, 2018, $357 and $525 were due from affiliates, respectively. There are no costs incurred by the Company as it is fully reimbursed, and there is currently a receivable outstanding. Additionally, Fortress affiliated entities provide certain administrative services to the Company. As of June 30, 2019 and December 31, 2018, $622 and $305 were due to Fortress affiliates, respectively.

Due to/from Affiliates

The tables below summarizes the balances outstanding with affiliates at June 30, 2019 and December 31, 2018:

	June 30, 2019		December 31, 2018
Amounts due to affiliates	$	6,329	$	4,481
Amounts due from affiliates		1,022		890

22.	Subsequent events

On August 12, 2019, NFE South Power Holdings Limited (“South Power”), a wholly owned subsidiary of the Company, executed a binding commitment letter pursuant to which a financial institution committed to purchase $180,000 in secured and unsecured bonds (the “Senior Secured Bonds” and “Senior Unsecured Bonds”, respectively). At closing, South Power will issue up to $72,000 and $45,000 in Senior Secured Bonds and Senior Unsecured Bonds, respectively. Additionally, the commitment to purchase Senior Unsecured Bonds may increase to $50,000 prior to closing. The Senior Secured Bonds will be secured by the dual-fired combined heat and power facility in Clarendon, Jamaica (the “CHP Plant”) that is currently under construction and related receivables and assets, and the proceeds will be used to fund the completion of the CHP Plant and to reimburse advances made by the Company. Upon completion of certain conditions, South Power will have the ability to issue an additional $63,000 Senior Secured Bonds.

The Senior Secured Bonds bear interest at an annual fixed rate of 8.25% and will mature 15 years from the closing date of each tranche. No principal payments will be due for the first seven years. After seven years, quarterly principal payments of approximately 1.6% of the original principal amount will be due, with a 50% balloon payment due upon maturity. Interest payments on outstanding principal balances will be due quarterly.

The Senior Unsecured Bonds will bear interest at an annual fixed rate of 11.00% and will mature 17 years from the closing date. No principal payments will be due for the first nine years. After nine years, principal payments will be due quarterly on an escalating schedule. Interest payments on outstanding principal balances will be due quarterly.

South Power will be required to comply with certain financial covenants as well as customary affirmative and negative covenants, including limitations on incurring additional indebtedness.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 that involve risks and uncertainties. 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 due to a variety of factors. This discussion and analysis includes information that 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. The results of operations for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for a full year.

You should read “Part II, Item 1A. Risk Factors” and “Cautionary Statement on Forward Looking Statements” elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”) and “Part I, Item 1A. Risk Factors” in the Annual Report on Form 10-K for the year ended December 31, 2018 (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 GAAP. The unaudited condensed consolidated financial statements as of and for the three and six months ended June 30, 2019 included herein, reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods on a basis consistent with the annual audited financial statements. All such adjustments are of a normal recurring nature.

Unless the context otherwise requires, references to “Company,” “NFE,” “we,” “our,” “us” or like terms refer to New Fortress Energy LLC and its subsidiaries. When used in a historical context that is prior to the completion of NFE’s initial public offering (“IPO”), “Company,” “we,” “our,” “us” or like terms refer to New Fortress Energy Holdings LLC, a Delaware limited liability company (“New Fortress Energy Holdings”), our predecessor for financial reporting purposes. Unless otherwise indicated, dollar amounts are presented in thousands.

Overview

We are engaged in providing energy and logistical services to end-users worldwide seeking to convert their operating assets from diesel or heavy fuel oil to liquefied natural gas (“LNG”). The Company currently has liquefaction and regasification operations in the United States and Jamaica. We currently source LNG from a combination of our own liquefaction facility in Miami, Florida and purchases from third party suppliers. We are developing the infrastructure necessary to supply all of our existing and future customers with LNG produced primarily at our own facilities. We expect that control of our vertical supply chain, from liquefaction to delivery of LNG, will help to reduce our exposure to future LNG price variations and enable us to supply our existing and future customers with LNG at a price that reflects production at our own facilities, reinforcing our competitive standing in the LNG market. Our strategy is simple: we seek to manufacture our own LNG at attractive prices, using fixed-price feedstock, and we seek to sell natural gas (delivered through LNG infrastructure) or gas-fired power to customers that sign long-term, take-or-pay contracts.

Our Current Operations

Our management team has successfully employed our strategy to secure long-term, take-or-pay contracts with Jamaica Public Service Company Limited (“JPS”), the sole public utility in Jamaica, South Jamaica Power Company Limited (“JPC”), an affiliate of JPS, and Jamalco, a joint venture between General Alumina Jamaica Limited (“GAJ”), a subsidiary of Noble Group, and Clarendon Alumina Production Limited, an entity minority-owned by the Government of Jamaica, with a focus on bauxite mining and alumina production in Jamaica (“Jamalco”), each of which is described in more detail below. Certain assets built to service JPS and JPC have, and the assets built to service Jamalco will have, capacity to service other customers. We currently procure our LNG either by purchasing it under a multi-cargo contract from a supplier or by manufacturing it in our natural gas liquefaction, storage and production facility located in Miami-Dade County, Florida (the “Miami Facility”). In the future, we intend to develop the infrastructure necessary to supply our existing and future customers with LNG produced primarily at our own facilities, including our expanded delivery logistics chain in Northern Pennsylvania (the “Pennsylvania Facility” and, together with the Miami Facility, the “Liquefaction Facilities”).

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Montego Bay Terminal

Our storage and regasification terminal in Montego Bay, Jamaica (the “Montego Bay Terminal”) serves as our supply hub for the north side of Jamaica, providing gas to JPS to fuel the 145MW Bogue Power Plant in Montego Bay, Jamaica. The Montego Bay Terminal commenced commercial operations in October 2016 and can store approximately two million gallons of LNG in seven storage tanks. The Montego Bay Terminal also consists of an ISO loading facility that can transport LNG to all of our industrial and manufacturing (“small-scale”) customers across the island. The small-scale business provides their users with an alternative fuel to support their business operations and limit reliance on monopolistic utilities.

Miami Facility

Our Miami Facility began operations in April 2016. This facility enables us to produce LNG for our customers and reduces our dependence on other suppliers for LNG. The Miami Facility is the first plant to successfully export domestically produced LNG from the lower 48 states to a non-FTA country and it employs one of the largest ISO container fleets in the world. The Miami Facility provides LNG to small-scale customers in southern Florida including Florida East Coast Railway via our train loading facility and other customers throughout the Caribbean using ISO containers.

Old Harbour Terminal

Our marine LNG storage and regasification terminal in Old Harbour, Jamaica (the “Old Harbour Terminal”) commenced commercial operations during the second quarter 2019 and is capable of processing approximately six million gallons of LNG (500,000 MMBtu) per day. The Old Harbour Terminal supplies gas to the new 190MW Old Harbour power plant (the “Old Harbour Power Plant”) operated by JPC. The Old Harbour Power Plant is substantially complete and is expected to be fully operational during the fourth quarter of 2019.

Results of Operations – Three and Six Months Ended June 30, 2019 compared to Three and Six Months Ended June 30, 2018

	Three Months Ended June 30,									Six Months Ended June 30,
	2019			2018			Change			2019			2018			Change
Revenues
Operating revenue	$	31,738		$	22,653		$	9,085		$	57,876		$	44,916		$	12,960
Other revenue		8,028			4,146			3,882			11,841			7,592			4,249
Total revenues		39,766			26,799			12,967			69,717			52,508			17,209

Operating expenses
Cost of sales		44,043			25,766			18,277			77,392			46,531			30,861
Operations and maintenance		5,403			1,907			3,496			9,902			3,751			6,151
Selling, general and administrative		32,169			15,535			16,634			81,918			27,404			54,514
Depreciation and amortization		2,110			732			1,378			3,801			1,428			2,373
Total operating expenses		83,725			43,940			39,785			173,013			79,114			93,899
Operating loss		(43,959	)		(17,141	)		(26,818	)		(103,296	)		(26,606	)		(76,690	)
Interest expense		6,199			1,603			4,596			9,483			3,206			6,277
Other expense (income), net		920			(199	)		1,119			(1,655	)		(167	)		(1,488	)
Loss before taxes		(51,078	)		(18,545	)		(32,533	)		(111,124	)		(29,645	)		(81,479	)
Tax expense (benefit)		155			280			(125	)		401			93			308
Net loss	$	(51,233	)	$	(18,825	)	$	(32,408	)	$	(111,525	)	$	(29,738	)	$	(81,787	)

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Revenues

Operating revenue from LNG and natural gas sales increased by $9,085 and $12,960, for the three and six months ended June 30, 2019, respectively. The increases in both the three and six month periods were primarily driven by the commissioning of the Old Harbour Terminal and increases in volumes sold at the Montego Bay Terminal. During the second quarter 2019, the Old Harbour Terminal commenced commercial operations, and we began to recognize revenue from our contract with JPC, adding $4,054 in operating revenue for both the three and six months ended June 30, 2019.

The delivered volume at the Montego Bay Terminal increased by 6.3 million gallons (0.5 TBtu) from 23.5 million gallons (1.9 TBtu) for the three months ended June 30, 2018 to 29.8 million gallons (2.4 TBtu) for the three months ended June 30, 2019. The delivered volume at the Montego Bay Terminal increased by 10.2 million gallons (0.8 TBtu) from 46.3 million gallons (3.8 TBtu) for the six months ended June 30, 2018 to 56.5 million gallons (4.6 TBtu) for the six months ended June 30, 2019.

The increase in volumes delivered at the Montego Bay Terminal were attributable to additional new small-scale customers as well as an increase in consumption at an existing customer due to the customer’s installation of a new gas turbine that consumes approximately 60,500 gallons (5,000 MMBtu) per day. Of the volumes delivered at the Montego Bay Terminal, 1.8 million gallons (145,151 MMBtu) and 0.7 million gallons (59,713 MMBtu) were delivered to small-scale networks in the three months ended June 30, 2019 and 2018, respectively. Of the volumes delivered at the Montego Bay Terminal, 3.0 million gallons (246,837 MMBtu) and 1.3 million gallons (106,173 MMBtu) were delivered to small-scale networks in the six months ended June 30, 2019 and 2018, respectively.

Other revenue increased by $3,882 and $4,249, for the three and six months ended June 30, 2019, respectively. The Company leases certain facilities and equipment, including the Montego Bay Terminal, to its customers which are accounted for either as direct financing leases or operating leases. We currently generate a majority of other revenue from interest recognized from direct financing leases or leasing revenue from operating leases. The increase in other revenue for both the three and six months ended June 30, 2019 was primarily driven by additional operating leases with small-scale customers. During the three and six months ended June 30, 2019, we also recognized revenue related to the installation of a pipeline; we did not have any such projects for customers ongoing during the comparable periods ended June 30, 2018.

Cost of sales

Cost of sales includes the procurement of feedgas or LNG as applicable, shipping and logistics costs to deliver LNG to our facilities and regasification to supply natural gas 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 and other direct costs to operate our Miami Facility are also included in Cost of sales.

Cost of sales increased by $18,277 and $30,861 for the three and six months ended June 30, 2019, respectively. The increase in Cost of sales was attributable to increased costs to purchase LNG from third parties. The weighted-average cost of gas increased from $0.69 per gallon ($8.29 per MMBtu) for the three months ended June 30, 2018 to $0.83 per gallon ($10.08 per MMBtu) for the three months ended June 30, 2019, which is inclusive of boil-off gas. The weighted-average cost of LNG increased from $0.64 per gallon ($7.75 per MMBtu) for the six months ended June 30, 2018 to $0.83 per gallon ($10.08 per MMBtu) for the six months ended June 30, 2019, which is inclusive of boil-off gas. Additionally, the volumes delivered increased by 31% and 22% for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018, respectively. The Company also incurred an increase in charter costs due to an additional ship charter at a daily rate of $50. During the three and six months ended June 30, 2019, we also recognized costs related to the installation of a pipeline for a customer; we did not have any such projects for customers ongoing during the comparable periods ended June 30, 2018.

Operations and maintenance

Operations and maintenance relates to costs of operating our Miami Facility, Montego Bay Terminal and Old Harbour Terminal, exclusive of costs to convert that are reflected in Cost of sales. Operations and maintenance increased by $3,496 and $6,151 for the three and six months ended June 30, 2019, respectively. The increases were primarily a result of higher costs associated with the operations of charter vessels of $1,921 and $3,615 in the three and six month periods ended June 30, 2019 respectively. The increase was also attributable to additional plant personnel costs that we incurred subsequent to the commissioning of the Old Harbour Terminal.

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Selling, general and administrative

Selling, general and administrative includes employee travel costs, insurance and costs associated with activities for projects that are in initial stages and development is not yet probable. Selling, general and administrative also includes compensation expenses for our corporate employees as well as professional fees for our advisors.

Selling, general and administrative increased by $16,634 and $54,514 for the three and six months ended June 30, 2019, respectively. The increase in the three months ended June 30, 2019 as compared to the three months ended June 30, 2018 was primarily attributable to stock-based compensation expense of $8,711, as well as increased headcount as compared to the same period in the prior year. The increase of $54,514 in the six month period ended June 30, 2019 as compared with the same period ended June 30, 2018 was driven mainly by recognition of $18,968 in the first quarter of 2019 due to vested restricted stock units (“RSUs”) issued to employees and non-employees after our IPO. We also incurred $8,711 in the second quarter of 2019 for continuing recognition of compensation expense related to RSUs granted in the first quarter of 2019. Additionally, there was an increase of $4,760 in transaction costs associated with financing activities. The remaining change is due to increased professional fees.

Depreciation and amortization

Depreciation and amortization increased by $1,378 and $2,373 for the three and six months ended June 30, 2019, respectively. The increase is primarily a result of additional equipment purchases placed in service for small-scale customers.

Interest expense

Interest expense increased by $4,596 and $6,277 for the three and six months ended June 30, 2019, respectively, primarily as a result of additional principal balance outstanding since March 2019 under the New Term Loan Facility (as defined below).

Other expense (income), net

Other expense, net increased by $1,119 for the three months ended June 30, 2019. Other income, net increased by $1,488 for the six months ended June 30, 2019. The increase in expense for the three months ended June 30, 2019 was driven by changes in fair value of the derivative liability and equity agreement associated with our acquisition of Shannon LNG in November 2018 and the change in value of an available-for-sale investment, which prior to the adoption of ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities was recorded in Other comprehensive income. For the six months ended June 30, 2019, Other income increased due to interest income of $2,473, which was partially offset by changes in the fair value of the derivative liability, equity agreement, and available-for-sale investment.

Tax expense (benefit)

Tax expense increased by $308 for the six months ended June 30, 2019 due to higher income in Jamaican entities.

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 only include our Miami Facility, our Montego Bay Terminal and certain small-scale customers. Our historical financial statements only include our Miami Facility, our Montego Bay Terminal and certain small-scale customers and do not include the impact of projects that commenced commercial operations during 2019, such as the Old Harbour Terminal and the increase in sales to small-scale customers. None of the periods presented include future revenue that should result from long-term, take-or-pay contracts with downstream customers expected from projects under development, including the dual-fired combined heat and power facility in Clarendon, Jamaica (the “CHP Plant”), the multi-fuel handling facility located in the Port of San Juan, Puerto Rico (the “San Juan Facility”), the LNG regasification terminal in La Paz, Baja California Sur, Mexico (the “La Paz Terminal”), the LNG terminal on the Shannon Estuary near Ballylongford, Ireland (the “Ireland Terminal” and, together with the Old Harbour Terminal, the Montego Bay Terminal, the San Juan Facility and the La Paz Terminal, our “Terminals”) and the Pennsylvania Facility. The Old Harbour Terminal began commercial operations during the second quarter 2019, and we expect the Old Harbour Power Plant, a significant buyer of gas from the Old Harbour Terminal, to be fully operational during the fourth quarter 2019.

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In addition, we currently purchase the majority of our supply of LNG from third parties. For the three months ended June 30, 2019 and 2018, we sourced 93% and 90%, respectively, of our LNG volumes from third parties. For the six months ended June 30, 2019 and 2018, we sourced 93% and 90%, respectively, of our LNG volumes from third parties. We are in the process of developing in-basin liquefaction facilities that will vertically integrate our supply and substantially reduce the need to source LNG from third parties, which, when combined with lower cost production, should significantly impact our results of operations and cash flows from both contracted and expected downstream sales.

•

Our organizational structure has changed as a result of reorganization transactions completed at the time of our IPO. We completed our IPO on February 4, 2019, and the net proceeds from the IPO were contributed to New Fortress Intermediate LLC (“NFI”), an entity formed in conjunction with the IPO, in exchange for limited liability company units in NFI (“NFI LLC Units”). In addition, New Fortress Energy Holdings contributed all of its interests in consolidated subsidiaries that comprised substantially all of its historical operations to NFI in exchange for NFI LLC Units. NFE is a holding company whose sole material asset is a controlling equity interest in NFI. As the sole managing member of NFI, NFE operates and controls all of the business and affairs of NFI, and through NFI and its subsidiaries, conducts the Company’s historical business.

The contribution of the assets of New Fortress Energy Holdings and net proceeds from the IPO to NFI was treated as a reorganization of entities under common control. NFE has presented the condensed consolidated financial statements of New Fortress Energy Holdings for periods prior to the IPO.

The financial statements of NFE beginning in February 2019 subsequent to our IPO allocate a significant portion of the results of operations to New Fortress Energy Holdings, through its non-controlling interest in NFI. NFE has elected to be taxed as a corporation and is subject to U.S. federal and state income taxes, and as such, may recognize a tax expense (benefit), as well as associated deferred tax accounts. As of June 30, 2019, NFE has recorded a valuation allowance on all of its deferred taxes associated with U.S. federal and state income taxes.

•

We have incurred and will continue to incur incremental selling, general and administrative expenses related to our transition to a publicly traded company. We completed our IPO on February 4, 2019, and we expect to incur direct, incremental general and administrative expenses as a result of being a publicly traded company, including costs associated with the employment of additional personnel, compliance under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), annual and quarterly reports to our common shareholders, registrar and transfer agent fees, national stock exchange fees, the costs associated with the initial implementation of our Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) Section 404 internal controls and testing, audit fees, incremental director and officer liability insurance costs and director and officer compensation. These direct, incremental general and administrative expenses are not included in our historical results of operations for the three and six months ended June 30, 2018.

Liquidity and Capital Resources

We believe we will have sufficient liquidity, cash flow from operations and access to additional capital sources, 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 a combination of cash on hand, borrowings from the New Term Loan Facility, and the issuance of Senior Secured Bonds and Senior Unsecured Bonds (both defined below) in the third quarter of 2019. Our IPO was completed on February 4, 2019, and we issued and sold 20,000,000 Class A shares at an IPO price of $14.00 per share, raising net proceeds of approximately $257,000. On March 1, 2019, the underwriters exercised their option to purchase an additional 837,272 Class A shares at the IPO price of $14.00 per share, less underwriting discounts, raising additional net proceeds of $11,048. On March 21, 2019, we drew the remaining availability on our New Term Loan Facility and have $497,500 outstanding as of June 30, 2019. On August 12, we signed a binding commitment to issue up to $180,000 in Senior Secured Bonds and Senior Unsecured Bonds.

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We have assumed total expenditures for all completed and existing projects to be approximately $765 million, with approximately $483 million having already been spent through June 30, 2019. This estimate represents the expenditures necessary to complete construction of the San Juan Facility, the La Paz Terminal, the CHP Plant as well as expected expenditures to serve new small-scale customers. We are currently exploring opportunities to expand our business into new markets, including the Caribbean, Angola and Mexico, and we will require significant additional capital to implement our strategy.

Cash Flows

The following table summarizes the changes to our cash flows for the six months ended June 30, 2019 as compared to the six months ended June 30, 2018:

	Six Months Ended June 30,
(in thousands)	2019			2018			Change
Cash flows from:
Operating activities	$	(92,068	)	$	(27,717	)	$	(64,351	)
Investing activities		(231,877	)		(76,002	)		(155,875	)
Financing activities		481,110			66,848			414,262
Net increase (decrease) in cash, cash equivalents, and restricted cash	$	157,165		$	(36,871	)	$	194,036

Cash (used in) operating activities

Our cash flow used in operating activities was $92,068 for the six months ended June 30, 2019, which increased by $64,351 from $27,717 for the six months ended June 30, 2018. For both the six-month periods ended June 30, 2019 and 2018, we had losses that comprised a significant portion of cash used in operating activities due to the continued expansion of our business activities. The loss in the six months ended June 30, 2019 reflects non-cash shared-based compensation expense, which was excluded from the cash used in operating activities. Cash flows used in operating activities for the six months ended June 30, 2019 was also significantly impacted by increases in receivables and other assets.

Cash (used in) investing activities

Our cash flow used in investing activities was $231,877 for the six months ended June 30, 2019, which increased by $155,875 from $76,002 for the six months ended June 30, 2018. The increase in cash flow used in investing activities is due to the increase in capital expenditures to complete the Old Harbour Terminal as well as construction of the CHP Plant and the San Juan Facility.

Cash provided by financing activities

Our cash flow provided by financing activities was $481,110 for the six months ended June 30, 2019, which increased by $414,262 from $66,848 for the six months ended June 30, 2018. The increase in cash flow provided by financing activities is due to additional borrowings under the New Term Loan Facility of $220,000 in March 2019 and the net proceeds received from the IPO in February 2019.

Debt

New Term Loan Facility

On August 16, 2018, the Company entered into a Term Loan Facility (the “Term Loan Facility”) to borrow term loans, available in three draws, up to an aggregate principal amount of $240,000. On December 31, 2018, the Company amended its Term Loan Facility (the “New Term Loan Facility”) to, among other things, (i) increase the amount available for borrowing thereunder from $240,000 to $500,000, (ii) extend the initial maturity date to December 31, 2019, (iii) modify certain provisions relating to restrictive covenants and existing financial covenants, and (iv) remove the mandatory prepayment required with the net proceeds received in connection with an initial public offering. Borrowings under the New Term Loan Facility bear interest at a rate selected by the Company of either (i) the LIBOR divided by one minus the applicable reserve requirement plus a spread of 4.0%, or (ii) subject to a floor of 1.0%, a Base Rate equal to the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 1 ⁄2 of 1.0% or (c) the 1-month LIBOR rate plus the difference between the applicable LIBOR margin and Base Rate margin, plus a spread of 3.0%. The Company initially borrowed $280,000 under the New Term Loan Facility. The New Term Loan Facility is set to mature on December 31, 2019 and is repayable in quarterly installments of $1,250, with a balloon payment due on the maturity date. The Company has the option to extend the maturity date for two additional six-month periods; upon the exercise of each extension option, the interest rate spread on LIBOR and Base Rate increases by 0.5%. To exercise each extension option, the Company must pay a fee equal to 1.0% of the outstanding principal balance at the time of the exercise of the option.

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The New Term Loan Facility is secured by mortgages on certain properties owned by the Company’s subsidiaries, in addition to other collateral. The Company is required to comply with certain financial covenants and other restrictive covenants, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments and dispositions. The New Term Loan Facility also provides for customary events of default, prepayment and cure provisions. As of June 30, 2019, the Company was in compliance with all required covenants under the New Term Loan Facility.

In March 2019, the Company drew the remaining $220,000 available capacity under the New Term Loan Facility, and as of June 30, 2019, the total principal amount outstanding under the New Term Loan Facility was $497,500. The Company plans to use the $220,000 drawn in the first quarter of 2019 to make capital expenditures to complete the CHP Plant and San Juan Facility, as well as for additional storage and regasification facilities for our small-scale customers. The Company paid $4,400 of additional fees in connection with the $220,000 draw on the New Term Loan Facility. These fees were capitalized as a reduction to the New Term Loan Facility on the condensed consolidated balance sheet. The total unamortized deferred financing costs as of June 30, 2019 was $6,977. In addition, the Company incurred $4,760 of costs for financing activities during the six months ended June 30, 2019 that were recognized as an expense within the condensed consolidated statements of operations and comprehensive loss.

South Power Senior Secured Bonds and Senior Unsecured Bonds

On August 12, 2019, NFE South Power Holdings Limited (“South Power”), a wholly owned subsidiary of the Company, executed a binding commitment letter pursuant to which a financial institution committed to purchase up to $180,000 in secured and unsecured bonds (the “Senior Secured Bonds” and “Senior Unsecured Bonds”, respectively). At closing, South Power will issue up to $72,000 and $45,000 in Senior Secured Bonds and Senior Unsecured Bonds, respectively. Additionally, the commitment to purchase Senior Unsecured Bonds may increase to $50,000 prior to closing. The Senior Secured Bonds will be secured by the CHP Plant that is currently under construction and related receivables and assets, and the proceeds will be used to fund the completion of the CHP Plant and to reimburse advances made by the Company. Upon completion of certain conditions, South Power will have the ability to issue an additional $63,000 Senior Secured Bonds.

South Power will be required to comply with certain financial covenants as well as customary affirmative and negative covenants, including limitations on incurring additional indebtedness.

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Off Balance Sheet Arrangements

As of June 30, 2019, we had no off-balance sheet arrangements that may have a current or future material effect on our consolidated financial position or operating results.

Contractual Obligations

We are committed to make cash payments in the future pursuant to certain of our contracts. The following table summarizes certain contractual obligations in place as of December 31, 2018:

(in thousands)	Total		Less than 1 year		Years 2 to 3		Years 4 to 5		More than 5 years
Long-term debt obligations	$	298,187	$	298,187	$	―	$	―	$	―
Purchase obligations		631,599		175,496		456,103		―		―
Operating Lease obligations		60,877		13,361		14,035		13,001		20,480
Total	$	990,663	$	487,044	$	470,138	$	13,001	$	20,480

As of June 30, 2019, there have been no material changes to the commitments and contractual obligations table above outside the ordinary course of business, except as noted below.

Long-Term debt obligations

For information on our debt obligations, see “—Liquidity and Capital Resources—Debt.” The amounts included in the table above are based on the total debt balance, scheduled maturities and interest rates in effect as of December 31, 2018.

In March 2019, the Company drew the remaining $220,000 available capacity on the New Term Loan Facility, and as of June 30, 2019, the total principal amount outstanding under the New Term Loan Facility was $497,500. The Company expects to pay $16,524 in interest payments during the remainder of 2019. If we exercise the option to extend the New Term Loan Facility, we will incur a fee of $4,963 in December 2019.

The Company expects to issue $72,000 and $45,000 of Senior Secured Bonds and Senior Unsecured Bonds, respectively, in the third quarter of 2019. No principal payments will be due until seven years after the closing date for the Senior Secured Bonds and nine years after the closing date for the Senior Unsecured Bonds. Quarterly interest payments for these bonds are expected to be $2,723.

Purchase obligations

The Company is party to contractual purchase commitments for LNG and natural gas, including additional contracts entered into subsequent to December 31, 2018. These contracts are principally take-or-pay contracts, which require the purchase of minimum quantities of LNG or natural gas, and these commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements.

In March 2019, the Company entered into a contract with Peninsula Energy Services Company Inc. for the purchase of 60,500 gallons of natural gas (5,000 MMBtu) per day for a total of 152.5 million gallons of natural gas (12.6 TBtu). The delivery is scheduled between March 2019 and November 2025.

Operating Lease obligations

Future minimum lease payments under non-cancellable operating leases are noted in the above table and further described below. The Company’s lease obligations are primarily related to LNG vessel time charters, office space, a land site lease, and marine port berth leases.

The Company entered into several lease agreements during 2018 in Mexico and Puerto Rico. Such agreements include securing certain facilities, wharf areas, office space and specified port areas for development of terminals. Terms for these leases range from 20 to 30 years, and certain of these leases contain extension terms. One-time fees paid subsequent to December 31, 2017 to secure leases were $21,871. Fixed lease payments under these leases are expected to be approximately $64 per month and $17,420 over the remaining lease terms. Some of these leases contain variable components based on LNG processed.

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The Company entered into an agreement to lease a floating storage regasification unit for an initial non-cancellable term of three years. The Company may continue to lease the vessel for up to 15 years with an option to renew for an additional five years. From January to March 2019, the Company was using the vessel for floating storage for the cost of $18 per day. Acceptance procedures were completed in the second quarter of 2019, and the vessel has been leased for $50 per day. Subsequent to December 31, 2018, the Company also entered into two additional LNG vessel time charters for contract terms ranging from three to five years.

Office space includes a newly fabricated space shared with affiliated companies in New York with a month-to-month lease, and an office space in downtown Miami, Florida, with a lease term of 84 months. The land site lease is held with an affiliate of the Company and has an initial term up to five years, and the marine port berth lease had an initial term up to 10 years. Both leases contain renewal options.

Summary of Critical Accounting Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Changes in facts and circumstances or additional information may result in revised estimates, and actual results may differ from these estimates. Management evaluates its estimates and related assumptions regularly, and will continue to do so as we further launch and grow our business. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Revenue recognition

The Company’s primary revenue stream is the sale of LNG and natural gas to customers, which is presented as Operating revenue in the condensed consolidated statement of operations and comprehensive loss. LNG or natural gas is delivered either by pipeline into the customer’s power generation facilities or in containers delivered by truck to customer sites, respectively. Revenues from sales delivered by pipeline to a power generation facility are recognized over time under the output method, as the customer takes control of the natural gas. Revenues from sales delivered by truck are recognized at the point in time at which legal title, physical possession and the risks and rewards of ownership transfer to the customer. Title typically transfers either when the containers are shipped or delivered to the customers’ storage facilities, depending on the terms of the contract.

The Company’s contracts with customers to supply LNG or natural gas may contain a lease of equipment. The Company allocates consideration received from customers between lease and non-lease components based on the relative fair value of each component. The fair value of the lease component is estimated based on the market value of the same or similar equipment leased to the customer. The Company estimates the fair value of the non-lease component by forecasting volumes and pricing of gas to be delivered to the customer over the lease term. The estimated fair value of the leased equipment, as a percentage of the estimated total revenue from LNG or natural gas and leased equipment at inception, will establish the allocation percentage to determine the minimum lease payments and the amount to be accounted for under the revenue recognition guidance.

The leases of certain facilities and equipment to customers are accounted for as direct financing or operating leases. Direct financing leases, net represents the minimum lease payments due, net of unearned revenue. The lease payments are segregated into principal and interest components similar to a loan. Unearned revenue is recognized on an effective interest method over the lease term and Other revenue in the condensed consolidated statements of operations and comprehensive loss is primarily comprised of such interest revenue. The principal components of the lease payment are reflected as a reduction to the net investment in the finance lease. For the Company’s operating leases, the amount allocated to the leasing component is recognized over the lease term as Other revenue in the condensed consolidated statements of operations and comprehensive loss.

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Impairment

LNG liquefaction facilities, and other long-lived assets held and used by the Company are reviewed periodically for potential impairment whenever events or changes in circumstances indicate that a particular asset’s carrying value may not be recoverable. Recoverability generally is determined by comparing the carrying value for the asset to the expected undiscounted future cash flows of the asset. If the carrying value of the asset is not recoverable, the amount of impairment loss is measured as the excess, if any, of the carrying value of the asset over its estimated fair value. The estimated undiscounted future cash flows are based on projections of future operating results; these projections contain estimates of the value of future contracts that have not yet been obtained, future commodity pricing and our future cost structure, among others. Projections of future operating results and cash flows may vary significantly from actual results. Management reviews its estimates of cash flows on an ongoing basis using historical experience, business plans, overall market conditions and other factors.

Share-based compensation

The Company estimates the fair value of RSUs granted to employees and non-employees on the grant date based on the closing price of the underlying shares on the grant date and other fair value adjustments to account for a post-vesting holding period. These fair value adjustments were estimated based on the Finnerty model.

JOBS Act

In April 2012, the Jumpstart Our Business Startups Act of 2012, or the “JOBS Act”, was enacted. Section 107 of the JOBS Act provides that an “emerging growth company,” or EGC, can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended, or the Securities Act, for complying with new or revised accounting standards. Thus, an EGC can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have taken advantage of the exemptions discussed above. Accordingly, the information contained herein may be different than the information you receive from other public companies.

Subject to certain conditions, as an EGC, we have elected to rely on certain of these exemptions, including without limitation, (1) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (2) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an EGC until the earlier of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of the fiscal year following the fifth anniversary of the date of the completion of our IPO, December 31, 2024; (iii) the date on which we have issued more than $1.00 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission or SEC.

Recent Accounting Standards

For descriptions of recently issued accounting standards, see “Note 3. Adoption of new and revised standards” to our notes to condensed consolidated financial statements included elsewhere in this Quarterly Report.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risks.

In the normal course of business, the Company encounters several significant types of market risks including commodity and interest rate risks.

Commodity Price Risk

Commodity price risk is the risk of loss arising from adverse changes in market rates and prices. We may be impacted by the fluctuations in natural gas prices, and our exposure to market risk associated with LNG price changes may adversely impact our business. However, we are generally able to limit our exposure given our pricing in contracts with customers is based on the Henry Hub index price plus a contractual spread. Also, we have a strategic sourcing and price strategy to mitigate risk from commodity price fluctuation. We will continue to evaluate the need for future price changes in light of trends, our competitive landscape and our financial results. Furthermore, we do not currently have any derivative arrangements to protect against fluctuations in commodity prices, but to mitigate the effect of fluctuations in LNG prices on our operations, we may enter into various derivative instruments.

Interest Rate Risk

Debt that we incurred under the Term Loan Facility bears interest at variable rates and exposes us to interest rate risk. Interest is calculated under the terms of the New Term Loan Facility based on our selection, from time to time, of one of the index rates available to us plus an applicable margin that varies based on certain factors. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Debt.” With the full $500 million principal amount drawn and outstanding, the impact on interest expense of a 1% increase or decrease in the interest rate of the New Term Loan Facility would be approximately $5 million per year. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.

Foreign Currency Exchange Risk

We primarily conduct our operations in U.S. dollars, and as such, our results of operations and cash flows have not materially been impacted by fluctuations due to changes in foreign currency exchange rates. We expect our international operations to continue to grow in the near term. We do not currently have any derivative arrangements to protect against fluctuations in foreign exchange rates, but to mitigate the effect of fluctuations in exchange rates on our operations, we may enter into various derivative instruments.

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Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

In accordance with Rules 13a-15(b) of the Exchange Act, we have evaluated, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30, 2019. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure and is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Based upon that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of June 30, 2019 at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1.

Legal Proceedings.

We are not currently a party to any material legal proceedings. In the ordinary course of business, various legal and regulatory claims and proceedings may be pending or threatened against us. If we become a party to proceedings in the future, we may be unable to predict with certainty the ultimate outcome of such claims and proceedings.

Item 1A.

Risk Factors.

You should carefully consider the following risk factors together with all of the other information included in this Quarterly Report, including the information under “Cautionary Statement on Forward-Looking Statements.” If any of the following risks were to occur, our business, financial condition and results of operations could be materially adversely affected. Additional risks not presently known to us or that we currently deem immaterial could also materially affect our business. This Quarterly Report includes forward-looking statements regarding, among other things, our plans, strategies, prospects and projections, both business and financial. As a result, you should not place undue reliance on any such statements included in this Quarterly Report.

Risks Related to Our Business

We have not yet completed contracting, construction and commissioning of all of our Terminals and Liquefaction Facilities. There can be no assurance that our Terminals and Liquefaction Facilities will operate as expected, or at all.

We have not yet entered into binding construction contracts, issued “final notice to proceed” or obtained all necessary environmental, regulatory, construction and zoning permissions for all of our Terminals and Liquefaction Facilities. There can be no assurance that we will be able to enter into the contracts required for the development of our Terminals and Liquefaction Facilities on commercially favorable terms, if at all, or that we will be able to obtain all of the environmental, regulatory, construction and zoning permissions we need. In particular, we will require agreements with ports proximate to our Liquefaction Facilities capable of handling the transload of LNG directly from our transportation assets to our occupying vessel. If we are unable to enter into favorable contracts or to obtain the necessary regulatory and land use approvals on favorable terms, we may not be able to construct and operate these assets as expected, or at all. Additionally, the construction of these kinds of facilities is inherently subject to the risks of cost overruns and delays. Delays in the construction beyond our estimated development periods, as well as amendments or change orders under the construction contracts we have entered into or any future contract related to future developments, could increase the cost of completion beyond the amounts that we estimate, which could require us to obtain additional sources of financing to continue development on our estimated development timeline or to fund our operations during construction of such development. Any delay in completion of a facility could cause a delay in the receipt of revenues estimated therefrom or cause a loss of one or more customers in the event of significant delays. As a result, any significant construction delay, whatever the cause, could have a material adverse effect on our business, operating results, cash flows and liquidity. Additionally there can be no assurance that we will not need to make adjustments to our Terminals and Liquefaction Facilities as a result of the required testing or commissioning of each development, which could cause delays and be costly. Furthermore, if we do enter into the necessary contracts and obtain regulatory approvals for the construction and operation of the Liquefaction Facilities, there can be no assurance that such operations will allow us to successfully export LNG to our facilities, or that we will succeed in our goal of reducing the risk to our operations of future LNG price variations. If we are unable to construct, commission and operate all of our Terminals and Liquefaction Facilities as expected, or, when and if constructed, they do not accomplish the goals described in our Quarterly Reports or our Annual Report, or if we experience delays or cost overruns in construction, our business, operating results, cash flows and liquidity could be materially and adversely affected. Expenses related to our pursuit of contracts and regulatory approvals related to our Terminals and Liquefaction Facilities still under development may be significant and will be incurred by us regardless of whether these assets are ultimately constructed and operational.

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Our ability to implement our business strategy may be materially and adversely affected by many known and unknown factors.

Our business strategy relies upon our future ability to successfully market natural gas to end-users, develop and maintain cost-effective logistics in our supply chain and construct, develop and operate energy-related infrastructure in the U.S., Jamaica, Mexico, Puerto Rico, Ireland, Angola, the Dominican Republic and other countries where we do not currently operate. Our strategy assumes that we will be able to expand our operations into other countries, including countries in the Caribbean, enter into long-term GSAs and/or PPAs with end-users, acquire and transport LNG at attractive prices, develop infrastructure, including the Pennsylvania Facility and the CHP Plant, as well as other future projects, into efficient and profitable operations in a timely and cost-effective way, obtain approvals from all relevant federal, state and local authorities, as needed, for the construction and operation of these projects and other relevant approvals and obtain long-term capital appreciation and liquidity with respect to such investments. We cannot assure you if or when we will enter into contracts for the sale of LNG and/or natural gas, the price at which we will be able to sell such LNG and/or natural gas or our costs for such LNG and/or natural gas. Thus, there can be no assurance that we will achieve our target pricing, costs or margins. Our strategy may also be affected by future governmental laws and regulations. Our strategy also assumes that we will be able to enter into strategic relationships with energy end-users, power utilities, LNG providers, shipping companies, infrastructure developers, financing counterparties and other partners. These assumptions are subject to significant economic, competitive, regulatory and operational uncertainties, contingencies and risks, many of which are beyond our control. Additionally, in furtherance of our business strategy, we may acquire operating businesses or other assets in the future. Any such acquisitions would be subject to significant risks and contingencies, including the risk of integration, and we may not be able to realize the benefits of any such acquisitions.

Additionally, our strategy may evolve over time. Our future ability to execute our business strategy is uncertain, and it can be expected that one or more of our assumptions will prove to be incorrect and that we will face unanticipated events and circumstances that may adversely affect our business. Any one or more of the following factors may have a material adverse effect on our ability to implement our strategy and achieve our targets:

•

inability to achieve our target costs for the purchase, liquefaction and export of natural gas and/or LNG and our target pricing for long-term contracts;

•

failure to develop cost-effective logistics solutions;

•

failure to manage expanding operations in the projected time frame;

•

inability to structure innovative and profitable energy-related transactions as part of our sales and trading operations and to optimally price and manage position, performance and counterparty risks;

•

inability to develop infrastructure, including our Terminals and Liquefaction Facilities, as well as other future projects, in a timely and cost-effective manner;

•

inability to attract and retain personnel in a timely and cost-effective manner;

•

failure of investments in technology and machinery, such as liquefaction technology or LNG tank truck technology, to perform as expected;

•

increases in competition which could increase our costs and undermine our profits;

•

inability to source LNG and/or natural gas in sufficient quantities and/or at economically attractive prices;

•

failure to anticipate and adapt to new trends in the energy sector in the U.S., Jamaica, the Caribbean, Mexico, Ireland, Angola and elsewhere;

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•

increases in operating costs, including the need for capital improvements, insurance premiums, general taxes, real estate taxes and utilities, affecting our profit margins;

•

inability to raise significant additional debt and equity capital in the future to implement our strategy as well as to operate and expand our business;

•

general economic, political and business conditions in the U.S., Jamaica, the Caribbean, Mexico, Ireland, Angola and in the other geographic areas in which we intend to operate;

•

inflation, depreciation of the currencies of the countries in which we operate and fluctuations in interest rates;

•

failure to obtain approvals from the Pennsylvania Department of Environmental Protection and relevant local authorities for the construction and operation of the Pennsylvania Facility and other relevant approvals;

•

failure to win new bids or contracts on the terms, size and within the time frame we need to execute our business strategy;

•

failure to obtain approvals from governmental regulators and relevant local authorities for the construction and operation of potential future projects and other relevant approvals;

•

existing and future governmental laws and regulations; or

•

inability, or failure, of any customer or contract counterparty to perform their contractual obligations to us (for further discussion of counterparty risk, see “—Our current ability to generate cash is substantially dependent upon the entry into and performance by customers under long-term contracts that we have entered into or will enter into in the near future, and we could be materially and adversely affected if any customer fails to perform its contractual obligations for any reason, including nonpayment and nonperformance, or if we fail to enter into such contracts at all.”).

If we experience any of these failures, such failure may adversely affect our financial condition, results of operations and ability to execute our business strategy.

We have a limited operating history, which may not be sufficient to evaluate our business and prospects.

We have a limited operating history and track record. As a result, our prior operating history and historical financial statements may not be a reliable basis for evaluating our business prospects or the future value of our Class A shares. We commenced operations on February 25, 2014, and we had net losses of approximately $1.6 million in 2014, $14.2 million in 2015, $32.9 million in 2016, $31.7 million in 2017 and $78.2 million in 2018. Our strategy may not be successful, and if unsuccessful, we may be unable to modify it in a timely and successful manner. We cannot give you any assurance that we will be able to implement our strategy on a timely basis, if at all, or achieve our internal model or that our assumptions will be accurate. Our limited operating history also means that we continue to develop and implement various policies and procedures including those related to data privacy and other matters. We will need to continue to build our team to implement our strategies.

We will continue to incur significant capital and operating expenditures while we develop infrastructure for our supply chain, including for the completion of our Terminals and Liquefaction Facilities under construction, as well as other future projects. We will need to invest significant amounts of additional capital to implement our strategy. We have not yet entered into all arrangements necessary to obtain and ship LNG to the Old Harbour Terminal and Montego Bay Terminal (together, the “Jamaica Terminals”), and we have not completed constructing all of our Terminals and Liquefaction Facilities and our strategy includes the construction of additional facilities. Any delays beyond the expected development period for these assets would prolong, and could increase the level of, operating losses and negative operating cash flows. Our future liquidity may also be affected by the timing of construction financing availability in relation to the incurrence of construction costs and other outflows and by the timing of receipt of cash flows under our customer contracts in relation to the incurrence of project and operating expenses. Our ability to generate any positive operating cash flow and achieve profitability in the future is dependent on, among other things, our ability to develop an efficient supply chain and successfully and timely complete necessary infrastructure, including our Terminals and Liquefaction Facilities under construction, and fulfill our gas delivery obligations under our customer contracts.

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Our business is dependent upon obtaining substantial additional funding from various sources, which may not be available or may only be available on unfavorable terms.

We believe we will have sufficient liquidity, cash flow from operations and access to additional capital sources to fund our capital expenditures and working capital needs for the next 12 months. In the future, we expect to incur additional indebtedness to assist us in developing our operations and we are considering alternative financing options, including in local markets, or the opportunistic sale of one of our non-core assets. See “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report and “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report for more information on our New Term Loan Facility and the commitments to the Senior Secured Bonds and the Senior Unsecured Bonds. Before issuing any Senior Secured Bonds or Senior Unsecured Bonds we would need an amendment of or an approval under our New Term Loan Facility. If we are unable to secure additional funding, approvals or amendments to existing financing, or if additional funding is only available on terms that we determine are not acceptable to us, we may be unable to fully execute our business plan and our business, financial condition or results of operations may be materially adversely affected. Additionally, we may need to adjust the timing of our planned capital expenditures and facilities development depending on the requirements of our existing financing and availability of such additional funding. Our ability to raise additional capital will depend on financial, economic and market conditions, our progress in executing our business strategy and other factors, many of which are beyond our control. We cannot assure you that such additional funding will be available on acceptable terms, or at all. To the extent that we raise additional equity capital by issuing additional securities at any point in the future, our then-existing shareholders may experience dilution. Debt financing, if available, may subject us to restrictive covenants that could limit our flexibility in conducting future business activities and could result in us expending significant resources to service our obligations. If we are unable to comply with our existing covenants or any additional covenants and service our debt, we may lose control of our business and be forced to reduce or delay planned investments or capital expenditures, sell assets, restructure our operations or submit to foreclosure proceedings, all of which could result in a material adverse effect upon our business.

A variety of factors beyond our control could impact the availability or cost of capital, including domestic or international economic conditions, increases in key benchmark interest rates and/or credit spreads, the adoption of new or amended banking or capital market laws or regulations, the re-pricing of market risks and volatility in capital and financial markets, risks relating to the credit risk of our customers and the jurisdictions in which we operate, as well as general risks applicable to the energy sector. Our financing costs could increase or future borrowings or equity offerings maybe unavailable to us or unsuccessful, which could cause us to be unable to pay or refinance our indebtedness or to fund our other liquidity needs. We also rely on borrowings under our debt instruments to fund our capital expenditures. If any of the lenders in the syndicates backing these debt instruments were unable to perform on its commitments, we may need to seek replacement financing, which may not be available as needed, or may be available in more limited amounts or on more expensive or otherwise unfavorable terms.

We may not be profitable for an indeterminate period of time.

We have a limited operating history and did not commence revenue-generating activities until 2016, and therefore did not achieve profitability as of June 30, 2019. We will need to make a significant initial investment to complete construction and begin operations of each of our Terminals and Liquefaction Facilities, and we will need to make significant additional investments to develop, improve and operate them, as well as all related infrastructure. We also expect to make significant expenditures and investments in identifying, acquiring and/or developing other future projects. We also expect to incur significant expenses in connection with the launch and growth of our business, including costs for LNG purchases, rail and truck transportation, shipping and logistics and personnel. We will need to raise significant additional debt and equity capital to achieve our goals.

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We may not be able to achieve profitability, and if we do, we cannot assure you that we would be able to sustain such profitability in the future. Our failure to achieve or sustain profitability would have a material adverse effect on our business and the value of our Class A shares.

Our business is heavily dependent upon our international operations, particularly in Jamaica, and any disruption to those operations would adversely affect us.

Our operations in Jamaica began in October 2016, when our Montego Bay Terminal commenced commercial operations, and continue to grow. Jamaica is subject to political instability, acts of terrorism, natural disasters, in particular hurricanes, extreme weather conditions, crime and similar other risks which may negatively impact our operations in the region. We may also be affected by trade restrictions, such as tariffs or other trade controls. Additionally, tourism is a significant driver of economic activity in the Caribbean. As a result, tourism directly and indirectly affects local demand for our LNG and therefore our results of operations. Trends in tourism in the Caribbean are primarily driven by the economic condition of the tourists’ home country or territory, the condition of their destination, and the affordability and desirability of air travel and cruises. Additionally, unexpected factors could reduce tourism at any time, including, local or global economic recessions, terrorism, pandemics, severe weather or natural disasters. If we are unable to continue to leverage on the skills and experience of our international workforce and members of management with experience in the jurisdictions in which we operate to manage such risks, we may be unable to provide LNG at an attractive price and our business could be materially affected.

Because we are currently dependent upon a limited number of customers, the loss of a significant customer could adversely affect our operating results.

A limited number of customers currently represent a substantial majority of our income. Our operating results are currently contingent on our ability to maintain LNG, natural gas, steam and power sales to these customers. At least in the short term, we expect that a substantial majority of our sales will continue to arise from a concentrated number of customers, such as power utilities, railroad companies and industrial end-users. We expect the substantial majority of our revenue for the near future to be from customers in the Caribbean, and as a result, are subject to any risks specific to those customers and the jurisdictions and markets in which they operate. We may be unable to accomplish our business plan to diversify and expand our customer base by attracting a broad array of customers, which could negatively affect our business, results of operations and financial condition.

Our current ability to generate cash is substantially dependent upon the entry into and performance by customers under long-term contracts that we have entered into or will enter into in the near future, and we could be materially and adversely affected if any customer fails to perform its contractual obligations for any reason, including nonpayment and nonperformance, or if we fail to enter into such contracts at all.

Our current results of operations and liquidity are, and will continue to be in the near future, substantially dependent upon performance by JPS and JPC, which have each entered into long-term GSAs and, in the case of JPS, a PPA in relation to the power produced at the CHP Plant, with us, and Jamalco, which has entered into a long-term SSA with us. While certain of our long-term contracts contain minimum volume commitments, our expected sales to customers under existing contracts is substantially in excess of such minimum volume commitments. Our near term ability to generate cash is dependent on JPS’s, JPC’s and Jamalco’s continued willingness and ability to continue purchasing our products and services and to perform their obligations under their respective contracts which may include construction or maintanance of facilities necessary to enable us to deliver and sell natural gas or LNG. If any of JPS, JPC or Jamalco fails to perform its obligations under its contract, our operating results, cash flow and liquidity could be materially and adversely affected, even if we were ultimately successful in seeking damages from JPS, JPC or Jamalco for a breach of contract. Additionally, as many of our facilities are still in developmental stages, our entry into long-term contracts before such facilities are fully operational exposes us to extended counterparty credit risk.

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Risks of nonpayment and nonperformance by customers are a consideration in our business, and our credit procedures and policies maybe inadequate to sufficiently eliminate customer credit risk. In assessing customer credit risk, we use various procedures including background checks which we perform on our potential customers before we enter into a long-term contract with them. As part of the background check, we assess a potential customer’s credit profile and financial position, including their operating results, liquidity and outstanding debt, as well as certain macroeconomic factors regarding the region(s) in which they operate. These procedures help us to appropriately assess customer credit risk on a case-by-case basis, but these procedures may not be effective in assessing credit risk in all instances. As part of our business strategy, we intend to target customers who have not been traditional purchasers of natural gas, including customers in developing countries, and these customers may have greater credit risk than typical natural gas purchasers. Therefore, we may be exposed to greater customer credit risk than other companies in the industry. In particular, JPS and JPC, which are public utility companies in Jamaica, could be subject to austerity measures imposed on Jamaica by the International Monetary Fund (the “IMF”) and other international lending organizations. Jamaica is currently subject to certain public spending limitations imposed by agreements with the IMF, and any changes under these agreements could limit JPS’s and JPC’s ability to make payments under their long-term GSAs and, in the case of JPS, its ability to make payments under its PPA, with us. In addition, our ability to operate the CHP Plant is dependent on our ability to enforce the related lease. GAJ, one of the lessors, is a subsidiary of Noble Group, which recently completed a financial restructuring. If GAJ is involved in a bankruptcy or similar proceeding, such proceeding could negatively impact our ability to enforce the lease. If we are unable to enforce the lease due to the bankruptcy of GAJ or for any other reason, we could be unable to operate the CHP Plant or to execute on our contracts related thereto, which could negatively affect our business, results of operations and financial condition. On March 5, 2019, after review by the Puerto Rico Energy Bureau and the Financial Oversight and Management Board for Puerto Rico, our subsidiary, NFEnergía entered into a Fuel Sale and Purchase Agreement with the Puerto Rico Electric Power Authority (“PREPA”) for the supply of natural gas and conversion of Units 5 and 6 of the San Juan Combined Cycle Power Plant. PREPA is currently subject to bankruptcy proceedings pending in the U.S. District Court for the District of Puerto Rico. As a result, PREPA’s ability to meet its payment obligations under its contracts will be largely dependent upon funding from the Federal Emergency Management Agency or other sources. PREPA’s contracting practices in connection with restoration and repair of PREPA’s electrical grid in Puerto Rico, and the terms of certain of those contracts, have been subject to comment and are the subject of review and hearings by U.S. federal and Puerto Rican governmental entities. In the event that PREPA does not have or does not obtain the funds necessary to satisfy obligations to us under our agreement with PREPA or terminates our agreement prior to the end of the agreed term, our financial condition, results of operations and cash flows could be materially and adversely affected. Additionally, we may face difficulties in enforcing our contractual rights against contractual counterparties that have not submitted to the jurisdiction of U.S. courts.

PREPA has commenced a bidding process through which potential bidders could take control and ownership of PREPA’s transmission and distribution system. PREPA will solicit proposals from four selected bidders and expects to select a winner in the third quarter of 2019. We cannot predict how our relationship with PREPA could change if PREPA’s transmission and distribution system were to become privatized. If such ev