Good morning, and good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Golar LNG Limited 2Q2019 call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you, the conference is being recorded today on the 29th of August 2019. I would like to hand the conference over to our first speaker today, Iain Ross, CEO. Please go ahead.
Good morning, good afternoon, everyone. Thanks for joining the call today. My name is Iain Ross, CEO of Golar LNG. Today I am joined by Graham Robjohns, CFO, and Stuart Buchanan, Head of Investor Relations. As Graham is calling in from outside the office today, we also have Brian Tienzo on the call to discuss any of the financials in the event that Graham has problems with his phone line. Okay, turning to slide four in the pack. We continue to act on shareholder feedback around the perceived complexity of the business, and we will focus this discussion on the themes of simplicity, earning stability, liquidity, and near-term value. Today, we announce steps to improve simplicity of the business and provide near-term value to shareholders through the use of dividend cash to buy back 3 million total return swap shares over a phased period.
We have improved earning stability in the carrier fleet by placing a number of our ships on either fixed or market-linked rates. We have improved liquidity and put in place access to an immediate $180 million in credit facilities. On the back of Hilli success, we continue to build out our FLNG pipeline and as a result, have investment interest in our already contracted backlog from a number of infrastructure funds that see value in our FLNG contracts. Operationally, on slide five, we remain on track to spin out our ships before the year-end, supported by the new fixtures I mentioned and subject to visible improvement in the market continuing. On FLNG, Hilli has produced 25 cargoes to date. The Gimi conversion project is on track from both a cost and schedule point of view. I will give a little more detail on the FLNG pipeline later in the discussion.
We have made good progress on the downstream LNG distribution activities in Brazil through our Golar Power business, following on from the targeted year-end completion of the Sergipe gas turbine power project. With these highlights, I will hand over to Graham to take you through the numbers before having a closer look at the business sectors. Graham.
Thank you, Iain. Good day, everybody. I'd like to start on slide five, second quarter 2019 financial results. Total operating revenues were down this quarter at $97 million from $114 million last quarter due to the seasonally weak Q2 spot shipping market, as well as the impact of dry docking of four of our ships. Lower LNG demand in Asia pushed U.S. volumes into Europe and reduced ton miles, whilst at the same time, softer gas prices and elevated vessel deliveries combined to ensure that demand for spot tonnage was matched by sufficient availability throughout the quarter. Having said that, our fleet utilization actually increased from 51% in Q1 to 66% in Q2. Time charter commitments were still down because of the lower day rates.
Total fleet TCE therefore decreased from 39,300 in Q1 to 24,400 in Q2, although this was significantly negatively impacted by the scheduled dry docking of four vessels that each spent a portion of Q2 in the shipyard and sailing to and from the shipyard. The TCE for our TFDE vessels have therefore been reduced as a result of time getting to and from dry dock and cool down post dry dock in Q2, and also preparing for docking in Q3, where we have a further three vessels dry docking. Chartering vessels leading into dry docks also leads to idle time.
The reduction in shipping revenues was the key driver behind the reduced adjusted EBITDA at $40 million, in addition to a $3 million write of an old LNG balance in other operating gains and losses, as compared to a $9.2 million gain in the last quarter relating to the final settlement of the Golar Tundra terminated contract. We are reporting a net loss of $113 million in Q2, due in part to the weak shipping results and losses in equity in net losses of affiliates. Golar LNG Partners recorded a loss due to a large negative movement in interest rate swap mark-to-market valuations, and Golar Power is of course loss-making prior to the start-up of the Sergipe Power project in January 2020.
However, this loss has been significantly negatively impacted by derivative and valuation movements and one-off items totaling $68 million, as you can see on the table at the bottom right of the slide. Sorry, in the middle right of the slide. Turning to the balance sheet, our unrestricted cash position was $140 million as at June 30. Since the end of the quarter, we have added to our liquidity, as Iain has mentioned earlier, by refinancing our margin loan secured on Golar Partners units with a new $110 million facility, releasing initially $7 million to unrestricted cash, and also a new $150 million debt facility. It has also been interesting and encouraging that with the success of Hilli Episeyo, the signing of the contract with BP for Gimi, and Golar's general FLNG business development, we have attracted a great deal of interest from infrastructure funds.
We have received multiple expressions of interest and offers to invest in the current and future contract earnings backlog, which we continue to evaluate. Okay, turning over to the next slide. Last 12 months adjusted EBITDA was $307 million. Our further adjusted EBITDA, which is adjusted for non-recurring items and Golar LNG Partners' share of Hilli, was $187 million, which compares to just $12 million for the 12 months to June 2018. While this is a significant improvement, it should be noted that volatility in our results continues to be driven by the spot shipping market. After the proposed shipping spin-off, and as more of our FLNG and downstream projects come online, our results will start to reflect the fixed-price income stream that we have locked in over recent years. Turning to the next slide.
We show here our built-in potential EBITDA growth that will come from our FLNG and downstream assets and contracts that will now start to ramp up. EBITDA from these assets and contracts will increase significantly over the next few years as a function of the scheduled start of the Sergipe power station, January 2020, the expected increased utilization of Hilli, and the new Gimi FLNG contract to over $500 million per annum. These numbers exclude the $37 million per annum in dividends received from Golar LNG Partners, as well as some significant upside. Our last 12 months adjusted EBITDA under $187 million is based on only an average TCE rate of $46,000 a day. A $10K per day increase in this TCE across equates to a $40 million per annum increase in EBITDA.
Golar Power is also actively working on multiple downstream FSRU and small scale projects, which are relatively quick to first cash flow and therefore can materially add to EBITDA growth prior to the start-up of big FLNG. Okay, turning to the next slide. We can see here that even without the assumption of the proposed shipping spin, our earnings will become far more predictable as fixed-price contracts start to dominate, moving from 22% of fixed rate contracts currently to 71% once Gimi is operational. Turning over to the next slide. We have set out here the mechanics of the total return swap. 3 million shares underlie the swap, and these are owned by the bank that we entered into the TRS with. We have swapped with the bank the economic risks and rewards of the shares, the 3 million shares in return for paying interest.
As a result, we have a significant earnings and cash collateral volatility as our share price moves. To unwind the swap, we can either settle cash with the bank to buy back the shares or the bank can sell the shares into the market. We intend to use the cash collateral that we have posted and two quarters of dividends to fund the buyback of the 3 million shares. As you can see, the cash amount required to effect the buyout over and above the current cash collateral is $31 million. Moving over to the next slide and taking a look at our debt position. We set out here our adjusted net debt position, which as at June 30, including 100% of Hilli's $878 million debt, was $2.3 billion, or $1.8 billion excluding Golar LNG Partners' share of Hilli debt.
You should note that the split between the short-term and long-term contractual debt differs markedly from the balance sheet position as a result of the requirement to consolidate the Chinese banks leasing companies, so-called VIEs. An important part of the proposed shipping spin-off is, of course, the debt reduction from our balance sheet. The debt associated with the vessels earmarked for the proposed shipping spin-off equates to $1 billion, which you can see are marked on the slide. Subsequent to the quarter end, as we've mentioned, we've improved our liquidity with the refinancing of our margin loan and issuing $30 million of restricted cash, and with the new $150 million debt facility. We're also, of course, cleaning up and simplifying our balance sheet by unwinding our equity TRS and buying back the 3 million shares. Thank you. With that, I will hand back over to Iain.
Iain, are you there?
Thanks, Graham. Turning to slide 11 on FLNG. Our operations on Hilli are going well, with 25 cargoes now produced and 100% effective uptime. Our discussions with our customer on increasing throughput and potentially duration of the contract continue, and we remain optimistic that we will have this resolved by year-end. Hilli is performing well and ready to accept more feed gas with additional CapEx and modifications required. Our customer, however, has a responsibility to provide us with the gas and sell the LNG product. We believe there's a deal to be done that extends the volume and the duration of the contract, and I hope to have more detail in the next quarter. The Gimi conversion project is progressing well in Singapore, and we remain on schedule and on budget.
Most of the major equipment has been ordered, the life extension work and fabrication of the sponsons is progressing well. It's great to see that so many of the people working on the project from Golar and from our main contractors have worked previously on Hilli and are actively incorporating lessons learned from one project to the next. Truly, that's what our FLNG businesses are all about. As we build the portfolio, we are thinking about standardization and continuous improvement, whether that is at a conversion or, in fact, as a new build. This is important to customers, financiers, contractors, and suppliers who all take heart from reducing the risk in these projects through standardized designs and repeating a successful formula.
Our portfolio continues to evolve, and we have a number of negotiations and active agreements now in place with parties that are interested in exploring multiple applications for FLNG vessels. This gives us confidence in our product and the competitiveness it can offer our customers. Our FLNG strategy has two key elements. Firstly, we need high-caliber customers who can reliably provide feed gas, put together an offtake agreement that underpins the financing of the project. Secondly, right now, we need co-investors to support our equity participation and lift the project with us. I can report that we have a number of organizations that are interested in participating in both our existing assets, our projects under development, and also future portfolio projects. Clearly, these investments would come with different levels of investment premiums depending on the development maturity of the project. Turning to slide 12 and shipping.
The LNG carrier market has had a difficult quarter. This has extended somewhat in Q3. This has been driven by a combination of weaker LNG prices in Europe and Asia, which have kept the West to East arb closed, additional production coming from new facilities, mostly in the U.S., and basically adequate available short-term shipping for those reduced ton miles. As Graham mentioned, we've taken this time to schedule a number of dry docks of our TFDE fleet, which sees them through the usual major checks on hull, LNG tanks, and the like, but also the retrofitting of ballast water treatment systems to ensure compliance with maritime regulations.
We expect all planned dry docking to be complete well before the year-end of all our vessels, and this means that we will have a full complement of TFDE ships, all clear of dry docking for the next five years and ready for the winter season. Clearly, the dry docking eats into TCE figures, so next quarter will also experience some of that rate depression effect. What's more relevant perhaps is that the fourth quarter should see the spot rates increasing due to seasonal tightening of the market and the start of the structural disconnect that we and the rest of the industry have been discussing for a while. We have locked in this upside some of our vessels with six TFDEs on either floating rates, which are linked to the prevailing spot rate or fixed term deals significantly above the current spot prices.
This increased utilization and access to improved rates should see the shipping fleet TCE improve significantly from quarter four onwards. On that basis, we expect to spin off the fleet before the year-end. Moving to slide 13 in Golar Power. Two initial points to make. Firstly, the Sergipe project is scheduled for completion at the end of the year, and commercial operations are due to commence January 2020. Pre-commissioning of the power plant continues. The FSRU Golar Nanook is being hooked up to its mooring and first fire of the power station's gas turbines is now due in October. Commissioning of the plant and gas supply systems is underway and will progress over the coming four months. Although the overall timetable is challenging, commercial acceptance in January 2020 remains absolutely achievable.
The second point, which is the focus of the slide, is that the current lower LNG prices across the globe actually makes the whole thesis of diesel and other fuel switching to LNG even more attractive from an economic point of view, which also complements the environmental impact. Last quarter, we discussed the various benefits of switching fuels in Brazil, which is depicted in the lower graphic. The combination of those switching benefits and the oil price parity downward trend makes the conversion, sorry, makes the conversation with the gas consumers at the other end more compelling. Turning to slide 15 and taking a closer look at the development and rollout of the downstream hurdle.
In addition to Sergipe, we're working hard on terminal projects at Barcarena in the north of Brazil and Babitonga Bay in the south, having received key government licenses for an FSRU terminal in each location. There are different development schemes for the three sites, but the common feature beyond the anchor customer is the ability for Golar Power to utilize spare capacity in the FSRU. In respect of downstream LNG diesel switching opportunities, conversion of non-binding expressions of interest into gas sales agreements with customers in Brazil is progressing well. We've progressed access to the necessary infrastructure, including ordering some ISO containers to move the LNG up the river, access to trucking, and access to small-scale shipping to move the LNG around the coast. We expect to have first users online by the second quarter next year.
Slide 16 is a reminder of our group and Golar LNG contracted backlog. Slide 17 shows that Golar LNG backhaul spreads through time. Slide 17, coming back to our themes of simplicity, earnings stability, liquidity, and near-term value for shareholders. We expect to complete the shipping spin-off by year-end to simplify our capital structure, sharply cut our debt, and reduce earnings volatility. The TRS buyback will provide near-term value. It will reduce shares on issue, simplify the balance sheet, and decrease volatility in reported earnings. The new financing facilities of an immediate $180 million, alongside the fully underwritten $700 million for the FLNG Gimi, improves liquidity.
Confidence gained from continued operational strength, most notably from Hilli's 100% commercial uptime and the fact that the Gimi conversion project is on track, together with our prospects in FLNG going forward, is attracting interest from a number of infrastructure funds. Finally, strong expected FSRU-led growth in Brazil through expansion into downstream via our low CapEx rapid payback model should add near-term value to shareholders. At this point, I'd like to pause and hand back to the operator for questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. If you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you'd like to cancel the request, you can press the hash key. We do ask that there is a maximum of two questions asked per participant, and that there are no questions from the media. Once again, star and one for any questions. Your first question today is from the line of Jonathan Chappell from Evercore. Please go ahead.
Thank you. Good afternoon, guys.
Hey, John.
Iain, I wanted to start with the LNG spin-off, and I just want a clarification. You say it's subject to market conditions. What I'm trying to understand is it subject to equity market conditions? Is it subject to LNG shipping market following the similar seasonal path that it has the last couple of years? What's the structure look like to help us frame how the debt is going to be stripped out from the consolidated? Is this just going to be shares to existing shareholders, or are you looking to raise additional funds as part of this process?
I think the answer to the first person question is, of course, if we've got very poor equity market conditions, it will make it more challenging. Equally, if we don't see the recovery in the shipping markets that we're expecting, then that is going to make it more challenging. Those are the two main criteria moving forward. We haven't quite finalized exactly the structure moving into the next phase, but we still are considering bringing in another ship owner into the entity and then listing that entity separately.
Okay. That's helpful. Then my follow-up question is on just general liquidity and how you think about your growth pipeline. Clearly, there's a lot of different irons in the fire, whether it's other FLNG or the expansion of your downstream in Brazil. You added $180 million in this last quarter. Are you still fully financed for the projects that we have line of sight on today? How do you think about your liquidity availability as you pursue some of these other projects down either the downstream or the upstream angles?
Do you want to comment, Graham?
Yeah. Yes, I think to answer John, as you said, we've got some additional liquidity with this refinancing the margin loan, the new $150 million facility. With the $700 million facility, the amount that we've already funded into the Gimi project, we are funded on Gimi. New projects going forward predominantly in Golar Power, there will be some limited amount of CapEx. Obviously, it's only 50% will come from us. As we said in the release, some of the cash flow that's coming out of the Sergipe Power Station and the Nook will probably go into funding part of that CapEx. We're in a pretty comfortable position as we stand now, yes.
Okay. Thank you.
I think, sorry, John, if I can just add, the other message that we would give is that as we look to this FLNG portfolio, the clear message is that we are recognizing that to lift the next project, we are going to need some investment partner in that project.
I'm sorry to add a 2B. Is that what you meant by expressions of interest from infrastructure funds? You would use them as a partner to pursue long contracted FLNG business?
Yes, but there's two parts to that. We have infrastructure funds interested in investing in our existing assets, if you like, existing contracted assets. Equally, we have infrastructure funds and the like interested in working with us in future projects.
Sometimes there's overlap, it's the same entity, and sometimes they are different.
Right. Okay. Thanks very much, Iain. Thanks, Graham.
Thank you. The next question today is from the line of Randy Giveans from Jefferies. Please go ahead.
Howdy, gentlemen. How's it going?
Hey, Randy.
A few questions from me. First, any updated status for Hilli Train 3? I know three months ago you were in some detailed discussions. Just seeing how those are coming along. Is Train 3 FID a possibility by itself, or do you expect it to be paired with Train 4?
We remain in discussions with Perenco, I really think there's a will from both sides to find a solution. I don't think there's an FID as such. Basically, we're ready to go. We have a vessel that's able and capable of producing anything up to 2.4 million tons per annum now, it's up to our customer to determine how much additional gas they want to commit to. I think that's where they're obviously wrestling is, what is that commitment level? Is it going to continue to be in line with the existing contractual arrangement we have or something different? We've got a really good working relationship with Perenco. One of the things to bear in mind is that a private company like Perenco doesn't have any obligation or need to publish any information on their priorities, assets, expenditure plans, or the like.
Unlike a listed company, they can change their minds about those development plans without having to consider disclosure obligations. We sometimes struggle to get the full story out of what's happening, and until we've got something more firm to say, I'd rather not say anything more other than that I still remain optimistic and that capacity will be utilized, and we stick to our target of having something in place by the end of the year.
All right. That's fair. I guess for my second question, just looking at the stock price down more than 50% from this time last year, basically at a nine-year low. I know you announced a small share repurchase, at what point do you just take it private or at least aggressively repurchase shares? Why unwind the total return swap versus just buying shares in the open market?
I'll let Graham comment in a minute. As part of the unwinding of the total return swap is we also recognize the complexity that we've managed to build into this business over the years. As a direct consequence of that, as part of it, if you think about it as a buyback, it's the first place to look. Graham, do you want to comment further?
Well, yeah. I completely agree with what you said, really. If we're buying back shares, the obvious thing to do is remove the TRS because that does create earnings volatility with movements in the market-to-market valuation. It creates some kind of cash volatility as the share price moves up and down. Randy, you kind of said it was a small amount. 3% of shares out is, it's not huge, but it's not small.
That's fair. I guess, going forward, could there be additional share repurchases, just using your new liquidity, or would you need further suspension of dividends?
Well, I think we take that decision as we go along. The primary focus for the liquidity that we have raised is to continue to invest and build out our business.
All right. Well, I'll pass along and hop back in the queue. Thanks so much.
Thank you. The next question is from the line of Chris Wetherbee from Citi. Please go ahead.
Hi, guys. James on for Chris. Just wanted to touch on what you're seeing in shipping rates so far in 3Q, and if they're going to expectations, essentially just trying to get a sense of the risks to the market not hitting expectations in the fourth quarter and a potential delay in the spin-off.
What I would say is that we've seen an uptick from the end of quarter two into where we are quarter three is, this spot rate, if you like, is somewhere $50,000, $55,000, $60,000 a day. Of course, the big thing with that is how that translates into TCE and the other element being utilization. From our point of view, we have taken six of the 11 ships that are in The Cool Pool and increased their utilization to 100%, ranging from two fixed contracts, one that starts, actually early next month, beginning of September, the other one mid-October. Those are both at rates well in excess of the number I mentioned. That's one indication that we've got a fixing of charters for less than a year for those two, but they're at significantly higher rates. That's one indication that the rates are going up.
The second indication the rates are going up and our TCE will increase is that we have four further vessels on variable rate contracts. These are contracts where they are linked to the prevailing spot rate. Two of those four have got floor and ceiling elements, and two are floating at a very slight discount to the rate. All different structures. The market's keen to explore different structures. I think for me, that's another indication that the charterers are expecting the market to be increasing or else they would just sit tight and take ships on the spot. We have confidence that this thesis, and come back to the whole story about the number of ships needed to raise and move the cargoes that have come on and are due to come on. There's a shortage.
We think for the next couple of years, that will play out. We are seeing evidence in the rate structures and the fixtures that we've done most recently that that's holding true.
Got it. Thank you for the color. Just at a higher level, just wanted to touch on the lower gas prices and get your view on what you're seeing in the end market in terms of incoming demand around new projects, and just basically get a broader comment about that. Thank you.
Well, the lower gas prices. Sure, if you're sitting with a great big onshore LNG facility in the U.S. and you're trying to get a liquefaction plant going, the lower gas prices are going to be a bit of a challenge. There's a couple of things on that. First of all, none of the major customers that we're dealing with, these customers that I mentioned before, none of them would be relying on today's immediate spot gas price to launch a 20-year project. They're taking a long-term view on gas prices and the amount of demand that's going to come into the market, and therefore provide the drive to come up in price.
Secondly, as we discussed with what we're trying to do with Golar Power, the switching of coal, heavy fuel oil, marine diesel, and diesel for transportation to LNG, to gas, will create demand way in excess of the current wave of demand, which has been driven primarily by basically the Chinese switch from coal-fired power stations to gas-fired power stations. We believe that when that transportation light switch, in addition to the power switch, starts to come through, the demand rate will accelerate and therefore more LNG will be needed. You may have a short-term fluctuation with low gas prices, but medium to long term, we still see that the pricing will get into balance with the demand that it has to satisfy. The final point on that is that our solution in FLNG is highly competitive.
If there's one project that's going to get away, it's going to be one with a Golar FLNG vessel stuck on the end of it.
Thank you.
Thank you. The next question is on the line of Øystein Dahl from ABG Sundal Collier . Please go ahead.
Hey, good afternoon. Just a question on the liquidity. There's a couple of moving parts on the balance sheet after quarter end, with the margin loan, the new facility, and the netting of the TRS. I guess all those are meaningful numbers. You point to the release of the collateral credit, potentially $75 million. How much of unrestricted cash do you expect to hold by end of 2019 versus the $140 you have by June?
Graham?
Yeah. We don't typically give out forecasts of cash balances. I would just refer to the answer that I gave earlier to John's question. The TRS is kind of self-funding because we just need $30 million in unrestricted cash, and that's coming, as we said, from the next 2 quarters' distributions. The $180 million from the margin loan and the new facility is all available free cash, as would indeed the $75 million if we reach agreement on that with Perenco in the next month or so. Primarily that cash and our existing cash will be going to fund Gimi CapEx and other projects.
Secondly, the new $150 million facility, is that linked to Gimi in any sense?
No, it's not. No. If you mean in terms of security or anything like that. No.
Okay. Thank you.
Thank you. The next question is from the line of Chris Snyder from Deutsche Bank. Please go ahead.
Hey, guys. You talked about progress being made on the downstream Brazil opportunity with first users online via Q2 of next year. You have $100 million contracted EBITDA over the next 25 years from Sergipe and Nanook. How should we think about the EBITDA upside opportunity here from the downstream, and how quickly can we maybe see EBITDA go above that $100 million run rate?
The way that we're thinking about that is the buildup of the elements. First is get the customers lined up, get them signed up. Second, get the gas supply, get it secured. Third, make sure we got access to the infrastructure, so the ISO containers, shipping, trucking. What we have to do, we know what the pricing will be at that point. We have to understand and learn about what it's costing us to provide that. From that, we'll be able to extrapolate what the EBIT projection will be. In reality, we've got estimates, obviously. From there we can link it through scaling of the business. It's a bit premature for us to be able to comment on the speed of ramp-up of that business.
What we're hoping is that we'll have customers online by Q2 next year, and they will be generating EBITDA in excess of that $100 million. What I can't tell you yet is how fast that will scale up, because we're still working on the plan.
Okay, fair enough. You think maybe we could be exiting 2020 at an amount maybe meaningfully above $100 million?
I'll let you know when I know.
Just following up on the Perenco negotiation question from earlier. You guys said in the release you plan to complete negotiations by year-end. Does this mean that you would expect an agreement with Perenco by year-end, or will we just have a resolution by year-end, good or bad, and you can maybe start marketing P3 and P4 to someone besides Perenco?
I can't plan what my customer's going to do. I just am going to repeat the fact that we're ready, willing, and able whenever they are to accept more gas. What I am saying, from a timeline point of view, looking at the way the discussions are going, seeing the enthusiasm of both sides to get something done, we'll have something meaningful to report before the end of the year on the capacity of the vessel, what Perenco's plans are to use that, and how we see that developing over the coming years. I don't think I can say any more than that. I expect we will have some form of agreement in place, at least for any initial change before the end of the year.
Okay. You kind of, I think, have disclosed that the Train 3 economics were pretty similar to Train 1 and Train 2. As you guys are negotiating with Perenco, could the Train 3 economics change to maybe persuade them a little more? Has the soft LNG environment been weighing on the ability to get this done over the near term?
Think about it again, I think I made this comment earlier. Perenco have the obligation to sell the LNG once we've made it for them. Part of their dilemma is clearly they've got two bits to this equation. One, where are they going to get their gas for, and can they convince themselves what's the volume and for what duration they can provide us that gas? Second, who do they sell that gas to and over what period? Obviously, there's an existing arrangement that they have with their offtaker, and we can play inside that arrangement if you like. If you've got to generate a new arrangement, it might be more difficult with a little bit softer gas prices to get that going. I think, I'm repeating myself again, but let's see what our customer comes back to us.
As soon as we know something that is firm, we'll tell you.
Okay. That does it for me. Thanks for the time.
Thank you. The next question is from the line of Alonso Guerra-Garcia from Scotiabank. Please go ahead.
Thanks. Good morning and afternoon, Iain and team.
Hi, Alonso.
You made reference to these new couple of permits in Brazil for Golar Power. It sounds like there are still some moving pieces there. What is the timeline for advancing those projects, I guess, as far as finalizing the permit commitments and then transitioning those to FID?
I think they're both really exciting. We're well advanced with permitting, and we're probably a couple of years ahead of anyone else that wants to do permits there. That's the first thing. We do have permits for the construction of an FSRU terminal. Obviously, that's the first thing. As you know, Brazil, and we've been reporting over the years, you need a permit for many, many things. It's part of the little factory that we've got in Golar Power, is the ability to navigate this permitting infrastructure. I think the other development that I think is quite encouraging is that we're not sitting back and waiting for the winning of a power project as we did with Sergipe. If you remember with Sergipe, we won the power project, and that underpinned the development of the terminal.
We're looking at this slightly differently now because we've uncovered the downstream infrastructure opportunity. We believe that we don't necessarily need to have that power station there to underpin it. On one of the projects, we have a major customer that might take some offtake to get the terminal going. On the other one, it could be a small power station. On both of them, we have the opportunity for downstream distribution. I wouldn't be surprised in terms of your question on timing, that we try and get one of those away as an FID this year or at the latest early next year, because, we don't have to wait for a power station to get going in infrastructure. These are incredibly strategic assets, and once they're there, it provides us with competitive advantage.
Got it. That's helpful. If I'm not mistaken, this is the first time you've talked about Mark III and the potential for a 5 MTPA capacity. Could you talk about this new development and maybe what you need to get done with the Leviathan interim agreement to move towards FID there?
The only reason we called out Leviathan in name is because the proposed developers, Noble and our partners, put out a press release. We wouldn't normally have called that out. With Leviathan, it's just a design case on our Mark III design, which we are currently undergoing a FEED. Essentially, by the fourth quarter, we'll have an assessment of the metocean conditions, the process design, the cost, and the schedule, and we'll be able to go back and see if our vessel's competitive in that environment. We'll see what that yields. That's definitely in progress.
Got it. Thanks, Ian. That's it for me.
Thank you. The next question is from the line of Ben Nolan from Stifel. Please go ahead.
Hi, Ben.
Yeah. Hi.
Two new projects that you called out in the press release and talked about a little bit on the call. I know there's been a couple of questions asked about it, I'm trying to get a sense for I know you're going about it developmentally in reverse relative to Sergipe. What vessels are you looking at to be able to use for the FSRUs? Do you need something the size of the Tundra? Could you use something like the Spirit? There's 66% free utilization for the Nanook currently. Just trying to get a sense for which vessels would be used in those Brazil projects.
The Spirit's a good example of something that could be suitable. Tundra also could be suitable. Obviously, we are currently marketing Tundra for other FSRU and terminal opportunities around the world. It's almost a case of whatever comes first. If you think about right now, if we did nothing else, we have two vessels we could deploy immediately under those FSRU terminals. The way to think about it is let's get one going, see how that goes, and we've definitely got one of those vessels to fit that. I'm cautious about predicting which vessel will go where, because the FSRU business, as you know, it takes an impossibly long time for tendered FSRU contracts to materialize into anything. That's been our experience anyway. We have the vessels. We think it'd be a good place to put them to work.
Okay. That's helpful. Then more Brazil questions. On the upcoming power auction, I know that's in October, I believe. Do you guys have any update on that? Any new thinking, in terms of what the implications would be if you won it and kind of competitive nature around that bit? If you have any color, that'd be helpful.
I guess what I would say is we've got two or three projects lined up. The great unknown with these power auctions is that you don't know the demand until very close to the power auction. We've got different solutions depending on the demand from different places. Obviously, with the Sergipe expansion, we can be very competitive because we've already got the FSRU. Equally, we've got at least two other locations that we can work from. I don't think there's any more I can comment other than we've got several options to remain flexible and therefore competitive, depending on what the demand scenario looks like when it's issued.
Okay. That's helpful. That's all I have. Thanks very much.
Thanks.
Thank you. The next question is from the line of Ken Hoexter from Bank of America. Please go ahead.
Great. Good morning. On the FLNG, Iain, maybe you can just talk about why you ended the Delfin discussions, maybe provide some more color on the comments you made there.
Okay. If you refer to the screening criteria that I mentioned in that we need high caliber customers who can reliably provide feed gas and put together an offtake that underpins the financing of the project, combined with co-investors to lift the project with us. We just didn't feel that the Delfin opportunity satisfied those criteria. As we've previously said, it's really important for us to put our investment money and resources into the opportunities that have the greatest chance of getting to FID.
Just switching subjects, you talked about there were interesting investments, but only in existing streams or some infrastructure projects want some of the new ones. Maybe just talk about from your perspective and how is that different than what you've set up with the drop down at GMLP? Would you think about restructuring how you've got GMLP and maybe spin assets off or income streams off to infrastructure partners? How are you stepping back and thinking about those kind of comments?
I suppose I really think, I welcome Graham's comments on this as well, but I look at it in thinking we have these FLNG opportunities that are lining up. The portfolio is developing really well, and we're acutely aware of our need for capital discipline going forward. Therefore, we need investors to help us or co-invest with us. It's quite interesting because the discussions that we've been having on existing facilities, projects that we developed, there's definitely a premium to come there. I think if we can convert one of these deals, it'll show the market what other people think the value of maybe the Hilli, maybe the Gimi, maybe another project that's been developed is, and that should give a bit more clarity under the value of these contracts. The real driver for me is that we need the capital support to lift the project.
Yeah, I would echo that, Iain. If you think about it, in order for us to grow quickly or quicker, we need capital and we need that support. If you think about it in terms of, I know it's a bit of a bad memory, but when Schlumberger, we had OneLNG, and we set up Schlumberger on a 50/50 basis. At that point, we would have had 50% of every FLNG project going forward. That didn't really have any impact necessarily on whether there were future drop-down potentials for the MLP. We just had 50% of three projects instead of 100% of one project. That kind of way to think about it, I think.
I'm not saying 50% is the modus operandi. I'm just using that as an example.
Right. Thanks for that insight, Graham and Ian. Ian, maybe just to wrap up on that, the first part of the question, though, would you think about restructuring how you've dropped the assets to GMLP? Or is this kind of a go forward on future structures only?
I think they are unrelated. They're a separate discussion, really, Ken. I think my focus right now with this is what do I have to do to get a project lifted? We've got a good customer, they've got an opportunity. How do I get it going in from a financing point of view? Equity and finance. That's my immediate focus. If we have the opportunity to do something with it around the MLP or whatever later, that's for me secondary. We've got to get the project going first.
Which may be of interest to an investor as well.
Yeah.
You mean the risk up front?
No, the drop down at a later date.
The drop. Okay. All right. Hey, thanks for the time, guys.
Cheers.
Cheers.
Thank you. The next question is from the line of Craig Shere from Tuohy Brothers. Please go ahead.
Good morning. On the Perenco discussion, are you willing to materially give on the $73 million PCB option pricing if you get some linkage or upside LNG market recovery? To the extent that you succeed in expanding and extending that relationship, do you see that materially helping to finalize one of these infrastructure funded vessels?
It's an interesting line of discussion, Craig Shere, but it's just not appropriate that I comment on any aspect of the negotiation that we're having. I'd love to, but I just don't think that's appropriate. Could it impact-- obviously, if we've got more utilization of Hilli, that's perhaps of more value. Yeah, I just can't say any more on this subject, sorry.
Okay. I understand. If I can pick up on the Brazilian downstream question. I think the original guidance was that there was up to $100 million investment opportunity that would generate perhaps three times EBITDA or better over time. Is that still correct? Would a similar investment opportunity be available from a second FSRU FID possibly early in 2021?
I think you're referring to a comment that was made in the last quarter's release, where I think we said something like, if we could get a dollar spread on each MMBTU of excess capacity that was put through then that would yield $200 million to Golar Power. I think it was of that order. I think we're trying to develop the business and update it, so that's like a theoretical. We haven't carried out any of these negotiations and figured out how much of a spread we can actually get, nor do we have yet good feel for the ramp-up of utilization of that vessel. Rather than continue, that's a theoretical envelope, if you like. I think the opportunity scale set is probably similar in the other vessels.
What I'm saying is it's far too early for us to talk about the rate at which we ramp that up to, and we're working on that detail, obviously, internally.
Last on Brazil. The press release kind of suggested that maybe power coming online in January is a stretch, although still doable. How much could that slip?
Well, we've lost a little bit of time over the last 3 months, but mostly from several small issues that tend to happen at this stage of a project. Also more recently, we've had some bad weather that slowed down the final hookup. The way to think about it, the effect of that is that we've used up not all, but most of the float on the project, which just means that we've a plan that shows to get to the end of the year, we've got less float, and that is just normal in this type of project. We've got less slack to take account of minor delays. If there are any further delays, we'd expect them to be of a short nature. I'm saying days, not months. It's too early to say if there will be any.
The next phase is we gas up the turbines. We'll determine how smoothly they go. If you've ever been involved around commissioning of a large gas turbine plant, anyone that would like to predict that to any degree of accuracy is a braver man than me.
Understood. Appreciate the feedback.
Thanks, Craig.
Thank you. The next question is from the line of Lukas Daul from ABG. Please go ahead.
Yes, thanks. Just circling back on the spinoff that we are sort of indicating could happen by the end of the year. Just to be crystal clear, do you sort of intend to realize any cash proceeds from that? Do you have an ownership threshold that you would like to keep in the new entity?
I don't think we're disclosing any of that. We're still working on the structure. Obviously when we got that finalized, we'll be announcing.
Okay, fair enough. On Brazil, is the commercial acceptance necessary in order for you to start realizing that $100 million in EBITDA, or is it going to be triggered by the 1st of January date?
We have to be commercially accepted. We've got very detailed plans on the steps that we go through to get the plant ready, and then we run a short acceptance test at the end. That's fairly well-known and understood process to go through.
All right. Thank you.
Thank you. Next question is from the line of Michael Webber from Webber Research & Advisory. Please go ahead.
Hey. Good morning, guys. How are you?
Hey, Mike. Good to hear.
Hi, Mike.
Good to hear from you. Just a couple questions for you. Iain, just kind of big picture, I think Ken kind of focused this, but if I just think about Golar from a 30,000-foot view, you guys had mentioned the idea of finding capital partners for these projects, which is the way to approach them right now with maybe a more limited capital availability. There's a separate conversation that involves fixing the cost of capital so that you don't have to do that, because I know you ultimately don't want to do that. If I think about streamlining the Golar structure and it starts, I guess, the total return swap and the carrier spin would be the easier and more straightforward part of that equation. The downstream business and Golar partners with the shared assets are going to be much more complicated.
I guess my questions are, one, has the experience with the carrier spin and how long it's taken for the market? It's a market-dependent process. Has your experience with that increased the likelihood that any kind of simplification of the Golar structure is more of a grand bargain than a series of these kind of transactions that could take several years? I'll stop with that question there, I guess, I'll follow up, but just in terms of the likely sequencing for a simplification of Golar, is it more likely we see a series of these transactions, or do you think the odds have gone up that eventually some sort of grand bargain transaction where you simplify the structure and get into place where you want it?
Mike, I guess the first part is the experience around the shipping spin-off. It hasn't actually been that bad. I mean, what's happened is that we've had one of the first questions we were asked on the call, we've had two things going against us. One has been the capital markets, the other one's been the shipping rates, and they've either been counter-cyclical to each other or in violent tandem. We think we're coming out of the end of that to allow this to happen. In terms of preparedness, getting the financing set up for the ships, all of that's been ready. From that point of view, that's okay. In terms of the other elements of the jigsaw puzzle, our focus in Golar Power, which is the obvious other one to discuss, is really on building a big, sustainable business. That's the immediate priority.
If we do that, and if we are successful in building the business to the extent that we feel we can do with the downstream infrastructure and with multiple hubs for FLNG and gas distribution, then I think that'll be a nice discussion to see who the logical best owner of that business is at that time. Right now, our focus has got to be build it, rather than worry too much about that part of the future.
Got you. More like see a downstream spin before, like a GMLP simplification.
I don't think we've commented too much on GMLP's simplification. What we have said is our boards have definitely approved spin-off of the ships, and it's my intention to make that happen.
Okay. All right. No, that's fair. Just to pivot just to Delfin, I think you mentioned it a bit earlier in an earlier answer. Just the idea of kind of moving away from that project. Did the current trade and tariff situation play any kind of role in that, just in terms of the viability of a package deal with the Chinese yard export financing and offtake and kind of the value prop that I think most people associated with a project like Delfin?
We just didn't make enough traction around the two critical customer and financing elements. Our portfolio is really coming along nicely, and we've got to drop off the ones that we don't think are going to get there in the near term.
Got you. Okay. Thanks for the time, guys. Appreciate it.
Cheers, mate.
Thanks a lot.
Thank you. The next question is from the line of Eirik Hjelmeland from Pareto Securities. Please go ahead.
Yeah, just a quick one on the new $150 million facility. What's really the rationale behind you taking up that facility, and what kind of facility is it? What type of funding?
The rationale is to give us a comfortable amount of liquidity to cover our Gimi CapEx and other things that we want to do over the next few months, just to put us in a comfortable position. What was the second part of the question?
Is it a bank facility or is it-
Yes
additional lease financing? Yeah. It's a bank facility. Okay, thank you.
Yeah.
Thank you. The next question is from the line of Jason Gabelman from Cowen. Please go ahead.
Yeah. Hey, thanks for taking the question. I just wanted to go back to this discussion on LNG rates. Given that the LNG market is oversupplied and the expectation is it's going to be oversupplied for the next couple of years outside of kind of seasonal demand peaks. It seems like West-East arbs could be closed, especially outside of winter. How does that mindset figure in to the decision to spin off the LNG carrier business? I think you mentioned potentially listing it as a separate public entity. Do you think that makes sense given potential for rates to be volatile over the next couple of years?
First point is, we don't necessarily share your view that rates are going to be poor over the next couple of years. There may be volatility, we think because of the structural shortage of cargoes that need to be moved and ships that are available, noting that there are only so many deliveries due to come out of the yards, that we will see this deficit, and that will force the rates into a more acceptable position. The justification for us making this split, as we've said before, is that we have some investors that really like our long-term sustainable EBITDA business with 20, 30-year contracts, and they don't like the fact that they have a cyclic shipping business associated with it. Equally, we've got investors who would like to invest in the shipping business and have exposure to the things that are coming up.
They see that we've got these fairly large capital-intensive projects on the other side of the ledger. The very strong feedback that we've had from the investment community is that our view to split the two is a sensible way forward.
Got it. Thanks for that. Just a quick question on the financials. It looked like there was a large cash outflow on accrued expenses. It was about $60 million. What was that related to?
Yeah, unfortunately, our cash flow statement is, you'll note from a few quarters ago that it reconciles from total cash, including restricted cash, at the beginning and the end of the quarter. Therefore it includes a load of restricted cash movements that are in these variable interest entities with the Chinese leasing banks subsidiaries that we have to consolidate, and we kind of give out information. That particular movement related to a movement in restricted cash balance in one of those VIEs. Not all of it, obviously, but the majority of it.
Okay.
Yeah. It's not a real movement, which makes that statement not particularly helpful.
No, yeah, that helps clarify it. That's it for me. Thanks.
Thank you. There are no further questions at this time, I'll hand back to the speakers.
Thanks, operator. Well, I hope this session gave you some detail of our focus on simplicity, earnings stability, liquidity, and near-term value for shareholders. We can follow up for more discussion via Stuart in the normal way. In the meantime, may I thank you for your attendance and questions. We look forward to updating you on our progress next time. Thanks and goodbye.
Thank you. That does conclude the conference for today. Thank you for participating. You may now disconnect.