Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to today's Golar LNG Limited Q1 2019 results presentation. 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'll 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. I'd now like to hand the conference over to your first speaker today, Iain Ross. Please go ahead.
Thank you, operator. Good morning, good afternoon, everyone, welcome to Golar's Q1 2019 earnings call. Today, I'm joined by CFO Graham Robjohns, Head of IR Stuart Buchanan, and we're pleased to advise that our Chairman, Tor Olav Trøim , is also on the call. Turning to slide three, we have had a lot of feedback over the last few months about the things we can do to try and make the Golar story more simple, more appealing to some of the longer-term investors that we're trying to attract, and we hope to cover some of that today. Our vision is to participate competitively, sustainably, and of course, safely in the owning and operating of LNG infrastructure assets, which we believe are part of the world's need to move towards cleaner energy. Slide three is a reminder of our current assets.
Let me move to slide four and just cover the highlights before handing over to Graham for him to go through the numbers. The main achievements during the quarter were clearly to conclude all of the contractual agreements in order to get going on the Gimi FLNG conversion project for BP, which is now up and running and progressing to plan. As a reminder, the vessel should be on station and producing LNG in 2022, at which point it will start running down an EBITDA backlog of over $4 billion associated with the project. Our $700 million debt facility is in place. Our partner in this development, Keppel Capital, has subscribed to its 30% share in the project. The second project that we made a final investment decision on is the Viking conversion from a carrier to an FSRU for LNG Croatia, that project will commence next year.
Whilst we grew the EBITDA backlog, the amount of EBITDA that we generated during the quarter was about half of the Q4 2018 number, largely due to seasonally reduced shipping rates, but still was well above the first quarter last year. Importantly, subject to the shipping market improving as we think it will, we're getting closer to a spin-off of the TFDE fleet, having received approval from the board to move forward on that basis. Spinning off the ships will create two separate businesses that should be more appealing to investors individually than as a combined group. I'll now hand over to Graham to take you through the numbers in more detail before coming back to talk through the business segments.
Thank you, Iain, and good day, everybody. Starting on slide five and our income statement. Our net operating revenues were down this quarter at $97.8 million, from $141.8 million last quarter, primarily as guided as a result of a weak Q1 spot shipping market, which was largely driven by seasonality, as well as early Chinese LNG buying in Q4, leading to weak Asian LNG prices in Q1, which removed interbase and trading opportunities. As a result, utilization fell to 51% and TCEs to $39,300 per day. The reduction in shipping revenues was the key driver behind the adjusted EBITDA of $62.9 million, although realized earnings from the Brent-linked element of the Hilli Episeyo contract were also reduced at $2.2 million for the quarter.
The fair market value of the Hilli Episeyo linked oil contract, i.e., the unrealized element, recorded a gain of $28.4 million in Q1 as oil prices recovered from year-end. This, of course, compared to the very large loss of $196 million for Q4. We recorded a $34.3 million impairment in the quarter in respect of the steam LNG carrier, Golar Viking, the vessel being converted for our Croatian FSRU project. Although the sale is not expected to close until Q4 2020, the transaction triggered an immediate impairment test. As the current carrying value of the vessel exceeds the price a market participant would pay for it as an LNG carrier today, a non-cash impairment charge of $34.3 million has been recognized. A profit is, however, expected to be recorded when the sale actually closes, along with a net cash inflow of approximately $40 million.
Finally, equity and net losses of associates was significantly reduced this quarter due to the impairment of our holding in Golar LNG Partners that was recorded in Q4. Turning over to the balance sheet on the next slide, our unrestricted cash balance was $213 million as at March 31, as compared to $217 million at year-end. Included in our total restricted cash of $478 million is $175 million relating to the Hilli Episeyo letter of credit facility, approximately $29 million of which is expected to be released to free cash in Q2 2019, with a further $85 million scheduled to be released by May 2021.
Turning over to slide seven, our last 12 months further adjusted EBITDA, which is adjusted for non-recurring items and Golar LNG Partners share of Hilli, annualized for the full year was $186 million, which we would expect to increase as a function of an improving shipping market. Note that this is, as I say, after the deduction of a one-off gain associated with the Golar Tundra contract, and also, as I say, Golar Partners share of Hilli, but does not include distributions that we receive from Golar and Golar LNG Partners, which is currently approximately $37 million per annum. Moving over to slide eight, staying with EBITDA, cash generation from our FLNG and downstream assets and contracts will now start to ramp up.
We also expect our current base level adjusted EBITDA will improve as a function of an improving shipping market, given that the $186 million for the last 12 months numbers equates to an average TCE of only $44,000 per day. Cash generation will increase significantly over the next few years as a function of the start-up of the Sergipe Power Station, together with the Nanook FSRU, expected increase in utilization of the Hilli, and of course, the new Gimi FLNG contract. This will bring us to over $500 million a year. These numbers, as I say again, exclude any contribution from Golar LNG Partners in the form of dividends.
Third slide on EBITDA on slide nine, you can see that even without the assumption of the proposed shipping spin-off, our earnings will become far more predictable as fixed contracts start to dominate, and we move from a fixed element of contracts for 23% currently, to over 70% once the Gimi is operational. Turning over to slide 10, where here we show a breakdown of our debt. Adjusted net debt position as at 31st of March including 100% of Hilli's $894 debt was $2.2 billion, or $1.75 billion if you exclude Golar Partners share of Hilli's debt. We've also set out on this side the split between short-term and long-term contractual debt, which as you see, 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 approximately $1.17 billion. In terms of new debt, as Iain has mentioned, and as we reported in our earnings release on April 16th, Gimi MS Corp, our 70% subsidiary which owns the vessel Gimi, received a firm $700 million fully underwritten financing commitment. The facility will be available during construction at a tenor of seven years, and has an amortization of 12 years. We also expect that as we get nearer to commercial operations, this level of debt will increase, as was the case with Hilli.
In terms of other debt facilities, we've agreed a two-year extension on the Golar Tundra sale and leaseback facility, and a five-year amended facility in respect of the Golar Arctic got credit approval during the quarter. Okay, thank you, and I will now hand back to Iain to carry on with the presentation.
Thanks, Graham. I'm on slide 11, taking the business sectors in turn. Firstly, FLNG. Hilli is going well, currently offloading cargo number 20 this week. As we recently achieved a contractual milestone of 1.2 million tons of LNG produced, that allowed the LC to be reduced as Graeme mentioned. On the back of our continued satisfactory performance, discussions with Perenco are in progress with a view to increasing the production volume beyond the first three trains and potentially extending the overall duration of the contract. We expect to conclude these discussions well before the year-end, I'm sure that you'll understand if we don't go into any further details at this time, but we'll update you fully when we've concluded the agreements. The Gimi conversion project for BP has been kicked off, as mentioned.
We recently cut the first steel on the sponsons, as the project progresses, we're making sure that anything that we can learn from the Hilli operation is built into the design and operations of Gimi. It is recent and relevant operations experience that's making our discussions with other potential FLNG customers so constructive. Our pipeline of prospects remains very healthy, but it should be noted that these deals are complex and take time to conclude. Although we're confident that FLNG economics and risk profiles will result in readily refinanceable assets post-startup, one of the key challenges for Golar is our ability to commit our portion of the equity required during construction phase of a project.
Payment terms are a key component of this, we continue to work with yards and suppliers to try and optimize the commercial model, which will allow us to make this business more scalable. Turning to shipping on slide 12. The shipping market did experience a seasonal decline, with the TCE effectively halving from the fourth quarter. As usual, it was a combination of factors that led to the swing in rates. With a mild Asian winter, despite continued growth in China, we saw some nuclear restarts in Japan and Korea that largely offset that Chinese demand. The Arb closed the Atlantic-based cargoes from the U.S. and Russia into Europe doubled by volume compared to the first quarter 2018.
With these additional volumes remaining in Europe, ton miles and shipping rates continued to fall throughout the quarter, leaving spot TFDE and steam rates at 40,000 and 24,000 respectively by the end of March. Of course, with rate reductions, we also experienced reduced utilization, which in a down cycle has a greater effect on TCE. Although the rates softened further in Q2, we've recently seen the low point, shipping rates are now into their seasonal recovery. Forward gas prices of $9 per MMBtu being quoted for December gives solid support to an improved shipping market, our view on the coming structural shortage in shipping remains unchanged. Leading brokers continue to forecast a 10-plus vessel shortage at the end of 2019, increasing to more than 20 at the end of 2020.
Rates are expected to reflect this from the second half of this year onwards and remain strong for the next two years. This has resulted in an increase in requests for medium to long-term charters. We have a couple of deals already concluded and several more under discussion based on index-linked rates, which will secure full utilization of the chartered vessels. These deals will provide some support to fleet TCE moving forward. As mentioned in the introduction, at our recent board meeting in Bermuda, a decision was made to proceed with a spin-off of the company's TFDE LNG carriers into a separate business, subject to satisfactory market conditions, which will allow us to focus the company's future activities around FLNG, Golar Power, and the downstream assets.
We believe the spin-off will allow LNG shipping investors more direct exposure to the LNG carrier market without having to consider the longer-term CapEx projects. Golar is also in talks with other owners of similar tonnage to potentially join the new shipping company. Under the new arrangement, it should be noted that management of Golar's vessels will remain with Golar Management Norway. Turning briefly to the FSRU business on slide 13. The Golar Viking conversion project has taken FID, with long lead equipment now on order. She'll enter the conversion yard at Hudong at the beginning of next year and will trade as a carrier until then. This conversion contract will not consume any material amounts of cash due to the milestone payment structure agreed under the contract.
Other FSRU prospects are being pursued, but the approval process remains slow, and the returns are less attractive than other parts of the business can be. Turning to slide 14 and the Sergipe Power Station. Construction remains on track for commencement of operations on January 1st, 2020. The power station is now nearing mechanical completion, and pre-commissioning of selected systems has commenced in anticipation of first firing of the gas turbines currently scheduled for early July. Transmission lines from the substation to the grid were connected on the 3rd of May, and the FSRU Golar Nanook, with its commissioning cargo, is ready for hookup to the mooring. As a reminder, Golar's share of the earnings from this project are around $99 million per year for 25 years, regardless of whether power is dispatched or not.
As discussed on the last call, Golar Power commenced a strategic review, which focused on how we can ramp up the business now that Sergipe Power Plant is nearing COD. We had a progress update a couple of weeks ago, and there are a number of ways that we can grow the power business. Of course, we can continue to pursue Brazilian power options to underpin further developments like Sergipe, and we do have a couple of locations already permitted and with well-developed business plans, one at Barcarena in the north, another at Santa Catarina at the south. We will continue to pursue these projects because the problem is that we have the time frame between now and when we see cash flow is quite long. It's between four and six years away.
In thinking about smaller amounts of CapEx and shorter payback times, we've been closely examining the downstream distribution market for some time, and the clear conclusion of the review is that the immediate focus of Golar Power will be to utilize the strategic position of the Nanook FSRU to access the downstream small-scale LNG market in Brazil. If we turn to slide 15, we try to illustrate that there are several ways the Brazilian energy market is being serviced. We include a current reference price for the different forms. For example, the industry is paying about $50 per MMBtu for piped gas. Isolated communities are paying about $14 for HFO-generated power. Domestic consumers are paying about $20 per MMBtu for piped gas. Diesel for transport costs about $26 per MMBtu.
In this slide, we're attempting to show that we have a small-scale rollout solution for gas-fired remote thermal power, remote domestic gas consumption, and remote LNG transport. In all modes, we can generally beat the reference price for supply of LNG versus the current fuel. If you consider that 95% of the cities in Brazil are not connected to pipeline gas, there's an opportunity to displace expensive diesel and other fuels. The market in Brazil is large, with diesel consumption across the whole country equivalent to approximately 40 million tons per annum of LNG demand. The key to this plan is to use the FSRU Nanook. We've already invested $300 million to $400 million in the vessel, the pipeline, and the mooring, and that expenditure is justified and supported by the Sergipe Power Station project.
When the Sergipe Power Station is running at full capacity, it will only require a fraction of the volume of the FSRU. We therefore have access to around 200 million MMBtu per year spare capacity. If you turn to slide 16, the model we're developing involves breaking bulk from Nanook and transporting LNG to other coastal locations before transferring to storage tanks, secondary terminals, or truck loading stations for further transport to the destination. We have had detailed discussions with many of the small cities that can be served from the Nanook FSRU, and have received such strong interest from these communities, combined with the strong drive from the Brazilian government, that we're moving ahead with the detailed planning and costing.
The key will be to understand not only the cost of conversion for the consumer, but how we can make it as easy as possible for them to take advantage of the lower costs and improve environmental performance. The Nanook is a strategic asset and creates very high barriers to entry. By means of example, if we use all of the excess capacity of the Nanook and assume that, say, $1 per MMBtu can be captured, this is equivalent to around $100 million per annum in additional EBITDA for Golar Power. Importantly, the time between investment and cash flow is relatively short, with returns commencing in 12 to 18 months. We believe this model is replicable at other locations, such as Barcarena and Santa Catarina, and importantly, it can accelerate the positioning of strategic FSRUs in those locations in advance of a power station contract being awarded.
Turning to Slide 17, shows another example, this time looking at transportation. Diesel for transport costs $26 per MMBtu, as illustrated by the petrol pump or the diesel pump price that you can see in the slide. It'd probably be delivered in the form of LNG for about half the cost. Interestingly, LNG trucks cost about the same as diesel ones, and right now there are around 2 million trucks on the road in Brazil, using about 32 million tons per annum equivalent of LNG in the form of diesel. LNG cuts CO2 and nitrous oxide emissions by 30%, particulates by 70%, and it basically takes out any sulfur. It's cleaner and much cheaper to use LNG for transport than diesel, and infrastructure is relatively cheap and fast to roll out.
Moving now to Slide 18, this summarizes our contract earnings backlog, which is around $6.6 billion versus a current market capitalization of $2 billion and an enterprise value of $4 billion. We continue to look to build a strong and sustainable business with some high-quality customers. This seems like a good time to hand over to Golar's chairman, Tor Olav Trøim, for his views and some closing outlook comments.
Thanks, Iain. First of all, I want to thank all of you for listening in to the call. The reason why I wanted to participate in this call was to give an unfiltered message from the board to the company shareholder and prospective investors about the strategy we have set and the focus the board will have for the company going forward. To build a great company is never easy. I've had the pleasure of being a part of Group, which historically built some great companies, made a lot of money for shareholders, and nearly all of them went through some tough times before the shareholders ultimately got the reward.
Even our vision to sell cheap and healthy food through the consolidation of the salmon industry ended with big losses, no investor confidence, and a market capitalization of $1.2 billion in 2012, before the investors saw the value of cheap and healthy food, and today the price of the company is $11 billion after I've paid out another $3 billion. I'm proud of what our employees in Golar have done and have achieved over the last year. We delivered the world's first FSRU. We delivered the world's first FLNG, and we delivered under budget and on time. We have had 100% uptime of operation in the first year of operation. We started the construction of the second one after BP had spent 3 years in our offices vetting the vessels.
We are seen as a top-class operator of LNG carriers, we are in the process of completing construction of South America's largest thermal power plant, which will generate $1 million in EBITDA every day for the next 25 years. We have altogether gathered a backlog of more than $10 billion for the group with a very good margin. Not that bad for a company with a market capitalization of $2 billion. We are as board also ultimately responsible for giving return to shareholders. That is the most important thing you have in mind running a company, and we have not delivered over the last five years. I have to admit that it feels tough to announce a 20-year deal with BP with an unleveraged return of 13.5% at the same time see the share price fall.
Particularly is it hard when we are approached by pension funds out there which would be happy to see half of that return for a 20-year debt deal to an oil major. You can't blame it on the market. The LNG market is the fastest-growing energy market in the world outside of renewables and growing more than 10% a year. It's a great ESG story, and as Iain said, with significant pollution reduction, CO2 down 30%, SOx 100, and particulates down 60%. It is really an ESG case.
The biggest three challenges we have had and ultimately have been the hurdle in developing this company over the last years has been the slowness of the decision-making in this industry, the time it takes to execute from project through planning to permitting to construction and completion, a lack of developed financing for the LNG industry, which is a new industry. We now can let Nanook pick up the cargo from Hilli, use the FSRU capacity, and send gas into our power station in Brazil and let another near ship, which comes in the end of the year, start the distribution of small-scale LNG in Brazil from Nanook. It's result of 10 years of hard work in permitting, negotiating, financing, executing on a very firm conviction. LNG is cheap and clean energy.
That's why it, in percentage term, grows close to 10 times more than oil. I dare to say that the biggest value in Golar today is not the contracted cash flow, which all the analysts can estimate on a quarterly basis. It's the execution experience we have gained and the strategic value of that infrastructure we have built, which is strong in the tribe. There is only Golar and Petrobras today who can deliver LNG into Brazil, and it will cost hundreds of million dollars for anybody else and years to challenge us. The main target for the company now going forward, as Iain said, is to fill the production capacity of Hilli for a longer term than the initial contract. It is to increase the throughput on Nanook, and it is to produce merchant power in Brazil in the periods that we're not dispatched.
It is to replace diesel in the downstream market. It's all incremental revenue and EBITDA on a CapEx which already has been taken by the Golar shareholders. It is to use the further entry points we know are permitted in Brazil to deliver further LNG into the customer. The pump price for diesel in the world's food chamber in Amazonas was yesterday equal to $26 LNG prices. At the same time, LNG price in the U.S. market was yesterday $3.85. In Europe, it was $4.24, and the JKM price was $5.32 out in Asia. They are all prices which are equal to less than $30 oil. Gas LNG is significantly cheaper. What we need in addition to Nanook to go after this Brazilian market is a small-scale vessel. It's some LNG storage tanks, typically costing $500,000. There is some ISO containers, typically costing $110,000.
It's filling stations for trucks costing around half a million dollars. Then some trucks costing around $100,000. We're talking about less than $100 million to make a showcase for an energy revolution in what is the fifth-most populated country, a country which last year had diesel riots. I've never seen a more obvious and stronger and more profitable ESG investment case. This is what Golar ultimate is about, cheap and cleaner energy solution. In order to streamline the company for long-term cash flow return on investor, the board have decided to spin off the carrier business. We'll remain operators of the ship, but we think the volatility we have seen in the shipping business makes it difficult for investors to really understand what Golar is about. At the same time, we know we are heading into some interesting time in shipping.
We saw rates cross $200,000 per year last year. We dipped down in the first part of the year, but we've already seen clear signs of recovery. For the next two years, we know that LNG production coming on will outstrip the amount of new shipping capacity coming from the yard and thereby should lead to a tighter market in the two years to come. There is time now, if any time, to create a pure-play LNG shipping company. We have invested more than $5 billion to get here where we are today. From here on, it's much more a story about capital discipline, increased utilization of existing assets. It's all about return on assets with limited investment materially in it in order to create significant value for the company. We know we have the permit to build, for instance, an FSRU terminal in Barcarena.
We know the group have an FSRU laid up. We know that we, through these assets, can establish what normally is a $400 million terminal at a marginal cost of probably $50 million-$100 million. If we, after a couple of years, can get $1 in tariff on that throughput capacity, we're talking about an earnings potential of $180 million for having full throughput capacity on that. It just illustrates the economics of going downstream. We're talking about downstream methods that we typically pay back in two to three years. Not at least they come quickly, contrary to FLNG. They also create a very strong relationship to our customers long term. We are often asked why we haven't concluded more FLNG deals. People stating, asking us, are there enough opportunities? I'll tell you that's wrong.
We had three guys from Golar visiting one of the biggest energy company in the world last week. The company showed up with 40 people and presented us with 10 opportunities for FLNG developments. It's just an example. The reason we haven't concluded more FLNGs are twofold: the time to take for oil companies and governmental institutions to get to FID, and ability to get debt financing in the period between FID and startup. When you start production, you can usually leverage the contracts to and leave no equity. We have wanted to protect the upside for the existing shareholders in what we already have created by not diluting the capital. My friend Wes Edens, who runs New Fortress, and I share a vision. The biggest energy company 10 years from now might not exist today.
I'm in no way saying that it will be us, but I think as Wes and I say, what we do is we give customers cheaper and cleaner energy, and we can make a lot of money in between. I think this is generally a fantastic business model. I hope that we, next year, with that capital discipline and increased utilization of our assets and some of these unique downstream assets we know talking about can give back a higher return again and can complete our integrated energy company. That we can increase both short- and long-term earnings, and that we maybe even can make Golar great again. Between 2002 and 2014, we were the second-best performing stock in the OBX index, and we were up 1,500%.
We have a history to take care of, and we need to get back there. With $10 billion in the group backlog and $6 billion in order backlog in Golar itself, and a significant reduced debt load as a function of spinning of the shipping, and a mission to lower energy costs for everybody, I think we are on the right track. I'm very confident about the future, the team we have put together, and the assets we have, and I'm excited. Thank you.
Thanks, Tor Olav. With that, I'd like to hand back to the operator for questions.
Thank you. Ladies and gentlemen, we'll now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced, and it's the hash key to cancel. Must advise participants there is a limit to two questions per participant. Once again, that's star one to ask a question and the hash key to cancel. The first question today is from the line of Jonathan Chappell from Evercore. Please go ahead.
Thank you. Good afternoon, everybody.
Hey, John.
Iain, I wanted to ask about the key growth focus. The final bullet point was additional FLNG awards. I understand you can't really say much on Hilli, so I'll ask about the other two that are kind of in the probability tree. Any update on a second potential asset for BP or just any thoughts about the timing of how that may transpire? Also you introduced, in the press release, this comment about Delfin, a term sheet expected basis of a shareholders' agreement. If you could just explain a little bit of what that means and how that project's developing.
Thanks, John. There's no further update on the BP second vessel. BP still retain that right, and we've had no formal communication back on that. In terms of Delfin, we just wanted to update everyone that we have made a bit of progress in revising our term sheet from the previous agreement that we had. The challenge of that project remains, and the focus of that project remains on trying to link an offtaker and the supplier to allow that project to proceed, because that will be key to the financing of the opportunity. We've made good progress on the technical aspects of the project that are happening in the background. We're still trying to push and make some progress on the offtake. That's the critical path as it has been for the last 12 to 18 months.
Okay, no real change on timing?
No.
Okay. The second question has to do with the shipping business, and it's this comment that you made in the release and also in your comments about the recently concluded charters. I get that they're index linked, that's both good and bad, exposure to the market. Obviously, locking down the utilization is a huge positive. You remove one of the two variables from your net TCE. Can you provide a little bit more clarity as to how many of your ships have been contracted on these index links and also the durations for those contracts? Is it just bridging you to the winter or is it a multi-year period?
I'm not going to give specific details, we hope to end up basically with a large handful of ships that have got some degree of contract in that order. The duration that we're talking about is sort of north of 12 months for anything up to five years. There's quite a wide range. There is a flavor coming through of a trade-off between us getting utilization and relating it to the market. My view is that they're a positive development for the shipping fleet.
Okay. Is that something you think you'd disclose ahead of the spin-off or not?
I don't think we'd ever disclose that amount of detail for the shipping contracts.
Okay. I appreciate the thoughts. Thanks, Iain.
Cheers, John.
Thank you. The next question is from the line of Michael Webber from Wells Fargo. Please go ahead.
Hey, good morning, guys. How are you?
Hey, Mike.
Hi, Mike.
Iain, I wanted to touch on Golar Power. There are a handful of new slides in the deck. You guys clearly made a point to run through the different options you have in terms of finding ways to deploy that excess and then the capacity. I'm just curious, I guess one, is your confidence in small scale in Brazil, is that stemming from just the overall market opportunity or is this related to contracts either awarded or in bid? As you look at the different things you lay out on slide 16, how should we think about you guys cobbling together a book of business to absorb that excess capacity, in terms of just a broad sense of scale for both industrial, municipal, and service station outlets, and timeline?
The reason for the confidence in the small scale is when we went through the review, which we held at New York a couple of weeks ago. We went through the review of the work that has been done and the detailed work that's been done in analyzing the potential customers of the small scale. It was very thorough and very impressive. What that means is that we've gone to the level of having discussions with municipalities and end consumers. We've got letters of support and letters of intent and interest in taking LNG from us to the point where we've built up fairly detailed models of what those transactions could look like. What we have to do next is go to that next level of examination of the specific switching costs. We know how to get the LNG, as Tor Olav said in his remarks.
We can break bulk on Sergipe. We can take one of the Avenir ships and come around the corner. We know how much it costs for an overall isotainer or a larger tank.
The trick is to take that into the consumer and make it easy for them to take advantage of that low cost and environmental benefit. We're working on that, and that will spread out between the various forms and sources on slide 16. The two areas that are of most interest to us, one is, of course, trucking, as we detailed on slide 17, whereby-
If we can provide that fuel, we get some of that saving. The other one, of course, is where you've got diesel-fired power generation in remote communities deep into the heart of Brazil, displacing that diesel with LNG. Many of those power generation facilities are dual fuel anyway. Again, the switching-
costs are quite reduced.
Okay. Yeah, there are lots of ways, I guess, to carve that up. I guess maybe the best angle to ask about it would be, I guess, over the next couple of years, if you're talking about a Jan 2020 startup for the project in general, from there on, you're looking to place the excess capacity, what would the potential volume commitments look like one or two years out? I guess, what are you targeting?
I think what we're looking at is a ramp-up. I think once we reconvene towards the second half of the year, I would expect that if we have all our ducks in a row, we'll be pressing the button and pushing ahead with the first elements, if you like, of this type of distribution, learning from that, slowly ramping or quickly ramping up as fast as we can out into the rest of the community. I don't think we know yet just how much of that volume we can actually put through in this way. Also we do have capacity, for example, of Sergipe, for an extension to the Sergipe power station, we could have power station number 2. There'll be a ramp-up of some degree over the next couple of years to maximize the utilization of the power station.
I think during that time, we'll then be looking at what can we do towards perhaps one of the other locations to do that in advance of a power station award.
Got you. Okay. My second question is actually around Delfin, which I think you touched on with John a bit earlier. You mentioned an ownership structure there. Is the best way to think about this, that you're looking at something at the corporate level? Or is the best way to think of this on an asset-by-asset basis? Because that project could span multiple assets theoretically. Is this something where we're talking about a broader agreement, or we're taking it a step at a time on an asset-by-asset level?
I think we could end up with a broader agreement, right now we're absolutely taking it a step at a time because we've got to establish this offtake and supply duopoly, if you like, to make sure that we can underpin the financing of the project. We can spend all day looking at different structures, if we don't have an offtake that supports the project and the financing of the project, there's not much point.
Got you. Okay, I'll turn it over. Thanks for the time, guys.
Thanks, mate.
Cheers, mate.
Thank you. The next question is from the line of Randy Giveans from Jefferies. Please go ahead.
Hey. Howdy, gentlemen. How are you?
Hey, Randy.
Hey. A few questions from me. You mentioned Hilli trains three and four on slide 19. Is 4Q still the expected timeframe for Perenco to announce FID on train three? Any updated maybe expectations for train four? Maybe specifically, some hurdles, milestones that need to be achieved in the coming months for these trains to take FID.
As I said in the prepared remarks, we're right in the middle of a fairly detailed discussion with Perenco on how we can both extend the volume and potentially the duration of that overall contract. We will have that concluded, I would expect, well before the end of the year. Maybe just let us have those discussions without obviously disclosing what we're saying and doing in the middle of those discussions. Certainly when we've concluded them, we'll put out an announcement.
Sure. Okay. Just seeing if there are any updates on the timing. Obviously you mentioning that the board has approved the LNG carrier spinoff. In your guesstimation, what are the chances it actually happens, and would it be closer in the coming months, or is that a let's wait till rates really rally in 4Q 2019, 1Q 2020? With that, what is the exit process from The Cool Pool?
First of all, our belief, my belief is that the rates have had a turning point and will continue to improve as we go forward. On the basis, if that's correct, we've got the full backing of the board to go ahead with the spinoff of the ships. I would expect that that would take place in months, rather than in a particularly longer timeframe. We are working through the process right now of the detailed transition, should that go ahead in the way we think it's going to go ahead. We'll advise details of that a little bit closer to the time when we look like we're going to be pushing ahead with the arrangement.
Okay. All right. Sounds good. To quote Tor, good luck making Golar great again. Thanks.
Thanks.
Thank you. The next question is from the line of Chris Snyder from Deutsche Bank. Please go ahead.
Hey, good afternoon, guys.
Hey, Chris.
First question on the spinoff of the shipping fleet. I guess my question is, how sensitive are you guys to the sale price, just given that you'll likely retain ownership in the spin co, and the transaction could drive a pretty significant valuation uplift for the existing Golar entity?
I think that board's attitude, of course, we're going to remain a major shareholder in this company going forward when it's public. I think we're not that sensitive. At the same time, we want to do it in a positive momentum, and that's why we want to do it pretty quickly than use the next two years to get the share price around. We're not talking about raising significant external capital. I think we're talking to two parties, as disclosed in the documents. I think this is a deal which probably we should be able to do at a reasonable good price without too much need for capital from third-party.
Okay, fair enough. Then you also mentioned that term inquiries are picking up, the term rates seem pretty good. Are you planning to maybe lock up some of these vessels onto long-term contracts prior to the spin, as maybe this could increase interest, and/or impact the price you get for the fleet?
No. Possibly, the more realistic scenario is that towards the end of this year, we'll see term business with fixed rates probably coming back into the fray. The distance for us is a bit too far at the moment, which is why we're interested in these linked rate structures. Depending on when we do the spin-off, you could see some, but I think it's more likely that they would happen post spin-off.
I think what we've seen of rates now, we've seen spot rates, of course, have crossed $50. If you're index-linked, you're close to that. I think the last term deal, which was now announced in the market, is something about $80 for 12 months. We probably are pretty optimistic here for what to come this winter and not at least also the next winter. As Iain said, I think we'll hold back for the time being. If you're looking back to the situation in 2010, 2011, when the oil companies really became desperate was when rate was peaking. That's when we put on the charters.
Okay. Fair enough. Just lastly, I think almost everybody on the call today agrees that the stock is worth more than where it's trading at, and Tor did a good job of laying out this disconnect in his prepared remarks. Just in that context, how do you think about share buybacks?
I think we have, of course, $0.50 in dividend. That's $60 million. We have considered that, if that should be dividend, should it be buyback. We have, of course, 3 million TRSs. I think what's been important for us now is to get the financing in place for the BP thing, which the team here have done a great job getting the $700 million and limit our capital to that to the $300 million. Then it's a question, of course, if BP 2 is coming and the whole capital structure. It's also depending on what kind of financial structure do we ultimately end up with the shipping company. I think clearly, if we are walking the walk, we should buy back shares if you have excess capacity when we think the stock is clearly undervalued.
Okay. That does it for me. Thanks for the time, guys. I appreciate it.
Cheers, Chris.
Thank you. The next question is from the line of Craig Shere from Tuohy Brothers. Please go ahead.
Hi. Congratulations on a pretty good quarter in a rough environment, and nice disclosures today.
Thanks.
I have two kind of broad financing questions. One about project lending, the other about funding the ships, the FLNG. On the project lending, I was a little disappointed with the initial Gimi financing duration and amortization schedule, considering the strong credit and length of cash flows that are contracted behind it. What do you think it really takes to secure more project lender confidence, and getting better matched loan payments with the contracted cash flows? As a corollary to that, if you're successful with these Perenco discussions before year-end this year for an expanded and elongated Hilli utilization, would that tee up an immediate project debt refinancing opportunity?
Yeah. Hi, it's Graham. I'll tell you second question first, because that's a fairly easy one. Absolutely, yes. If we get a significantly extended term, then I think that's absolutely an opportunity to refinance the Hilli. On the Gimi financing, point taken, and I think Tor Olav kind of alluded to the challenges of financing FLNG projects, which is why we're looking at different structures going forward in terms of developing them. Bear in mind that the term was 7 years post COD, so it's an 11-year financing, which given the sort of Basel regulations now is long for a bank financing. It is absolutely the case that as we get nearer COD, we would expect to both increase the level of debt, flatten the amortization profile, and lengthen the term.
If you look at the FPSO business, which is in many ways a kind of similar business, which is a little bit more developed, you will typically see that they leverage 6 times the EBITDA to good counterparties on long-term contracts. I think we can do something similar here when you are at COD, and that means that you effectively take out all equity and you leverage
$1,200 million, $1,300 million against these assets. That should be doable. I think we were under some pressure to provide financing to effectively take FID with BP. I think we just said, "Okay, let's get this thing done, and then we can optimize financing as we go along over the next couple of years.
I've got no doubt as the industry becomes familiar and more comfortable with the concept of FLNG, the ability to finance will accordingly become more straightforward.
Great. My last question about funding the ships at the shipyards. Iain, you commented on efforts to get more flexible equity funding terms. Two thoughts come to my mind about possible drivers for that. One could be using alternative shipyards, maybe in China. Another could be just economies of scale. If somehow you're able to string together two, three, four FLNG conversions kind of concurrently, one after the other, that could tee up much better overall contract terms and also be a major sea change for the future of the company. Can you opine on what the drivers are for potentially better equity funding terms, and if any of the things I mentioned are on the table?
I think you're right, Craig, in that it doesn't have to be China, it could be Korea. It could be Singapore if the Singaporeans would come to the table. This is about creating something that's repeatable. If it's repeatable, it's treated more like a complex ship, maybe more like a drillship, for example, where if the design is such that it doesn't need to be changed, then we can get terms that are more akin to shipping terms. Instead of paying as we go, as we have to in the Singaporean conversions at the moment, we can maybe get 20/80 or some payment terms like that really allow us to take the benefit of export financing and therefore minimize our upfront CapEx. When these projects take three-plus years to complete, we can do a lot with that time.
It's a combination of all of the things you said, and we're looking at a number of variants to try and optimize it, which is why we're not saying one thing. We're looking at lots because I think may the best combination win.
Understood. If you could find the magic bullet to unleash both the upstream and downstream financing opportunities, you guys have tremendous upside.
Yeah, thanks.
Thank you.
Thanks, Craig.
The next question is from the line of Chris Wetherbee from Citi. Please go ahead.
Hi, this is Liam on for Chris. Thank you for taking my question. I just wanted to circle back to the spinoff situation here for the LNG carrier or the TFDE LNG carrier vessels. What is your plan for the Golar Arctic after the spinoff? Will you guys look to continue to own it and operate it, or are you going to look to sell?
For the time being, we would look to own and operate. We had some success with The Cool Pool on the TFDEs. I guess it's possible to set up a cool pool for steamships, but she would also be a potential conversion vessel, I guess, further down the line as well, or to operate as an FSU.
I think what the management have done a great job and is maximizing the value, of course, with the vessel going into Croatia, which we have effectively gotten a lot more for than we would have gotten in the secondary market. That's just a value enhancement of utilizing the vessels in different fashion. I think when people saying that, what is the steamship worth these days? We have to remember that there are still 200 steamships out of a fleet of 550. It's a pretty material part of the fleet we are still dependent on. These ships will come off charters as over the next five, 10 years to an extent. There were 20-year deals done in the beginning of the 2000s. I think we see the danger in being left with them. I think we're working in order to find solutions for them.
Some of them we have on charter right now, I think we're working, as Graham said, projects to trying to maximize the sales value of these assets.
Okay, thank you. Also, I just wanted to circle back on the Gandria. I know you guys never really talked about it too much, but I know it was solicited as a FLNG conversion candidate. I know it's hard to put a timeline around a potential conversion, but I was just wondering if you could touch on the potential for such a conversion and when you think something like that could happen, and how much EBITDA you would be able to generate from post-conversion.
The way to think about Gandria, well she's in layup right now, if you look at the BP contract and the EBIT that we can generate from that, I think if we could get a contract that gave us a similar return, we would go ahead with it. She's just there as the next potential conversion candidate ready to go.
Got it. I guess on that front, I know you guys don't really want to put a timeline around it, if you were to give a sense on how long you think it would take from when you got that initial level of interest into when post-conversion, can you give some sort of sense on the number of how long that would take?
It's almost impossible to say, Liam, because I think we've been talking to BP actively for 2 years between real serious discussion and review, actually signing a contract. What I would say is the level of interest that we've had from large companies of the same size and scale as BP, really taking an interest in both our Mark II and Mark III designs and a Mark I conversion. That's really ramped up and continues to ramp up every quarter. We're finding different groups of people coming in and getting more and more comfortable with the technology. So it's almost like you have to go through these phases of, does FLNG work? I think Hilli proves that. Is it something that is acceptable for a larger, publicly-owned company? For whatever reason, I think BP's ticking the box has sort of satisfied that.
As a result of that, we're getting more interest. You would hope that the next FLNG contract would be faster than 2 years, I certainly don't want to create expectations now of having one just around the corner. These things are hard to get going.
I also think it's important to add that what we have seen, every time we do an FLNG, you have three, four years of pretty heavy capital commitments, which goes out, then we have no earnings. I think what the company is saying is that now let's focus on things which actually can bring earnings in 2020 and 2021 and 2022. Long term, before we get any earnings from FLNG, and that's earning, which is effectively based on the assets we already have invested in. It doesn't need a lot of CapEx. It's a very different profile. I think let's go after that first, try to build the confidence back in the stock that people actually see me making serious money. Then we can talk about doing a lot more FLNGs.
That's great, Colin. Thank you very much.
Thanks, Liam.
Thank you. The next question is from the line of Gregory Lewis from BTIG. Please go ahead.
Yes. Thank you, and good afternoon. Actually, thanks for squeezing me in at this point. Iain, it's interesting and maybe a little inspiring to see you guys try to move into the downstream business in Brazil on the back of the Sergipe project. That being said, there probably are going to be some challenges. It's kind of a step out of your business. Is this something where we're going to be looking to hire a team to spearhead this? Is there potential local partners you can partner with? I'm just trying to understand what Golar has to do over the next, I guess, what, 12 to 18 months to get this in a position where it can actually be successful.
It's a good question. I wish you were sitting in our board meeting. We've already hired a leader and a team. In fact, the chap that we've got leading the team has done this rollout before. He's probably the only person who's done it before. We're really impressed with the work that we've done. We are very advanced in terms of this isn't just an idea. It was an idea when we started talking about this at least 12 months ago on the quarterly calls, when we've said we're looking at using the small-scale downstream capacity of the Nanook. There's a lot of work that's been done to prove this up. We think it's real.
We're going to move ahead with it, hopefully, if not on the next quarter's call, certainly the quarter after that, we'll have some significant updates to give in terms of detail around it and how we're moving forward.
Okay. Then just also in the prepared remarks, you mentioned some of the problems that are facing the build-out of FLNG has been financing of projects. Is it more a function of the terms that are being offered or maybe an overall sense of lack of any terms being offered? Is it about pricing or really just the availability of capital to do these projects?
Yeah, it's Graham. I think primarily, we kind of touched it on the question earlier where we're looking at a $700 million facility for the Gimi, which is that 50% LTV. It's the amount of financing during that construction period that's the challenge. The pricing on the Gimi financing is not that high. It's the amount of debt. As we said before, I think as this market develops, that will slowly change. Rather than sitting around and waiting for that, again, as we've said, we're looking to have better arrangements with the yard so that we have better payment terms and therefore the financing is not so much of an issue.
Okay. Then just thinking about what you did at Golar Power by bringing in an outside third party investment partner, is that something that we could potentially see on the FLNG side, or at this point there's really no discussions around that type of event?
It's feasible. We talk to people all the time who want to perhaps participate. If we can get somebody coming into the FLNG business that values them as what they are, which is downstream LNG infrastructure facilities, and they want to invest with us at what we think they're worth, which is maybe 10 to 12 times EBITDA, we're all for that type of conversation. We'll see how it plays out. We've got nothing imminent in that story.
Okay, guys. Thank you very much for the time.
Thanks.
Thank you. The next question is from the line of Jason Gabelman from Cowen. Please go ahead.
Thanks for taking the call. I'll just keep it to one. I was wondering how you envision GMLP fitting into kind of the new structure that you see emerging over the next six months. Clearly, the valuation at the MLP seems a bit discounted. Do you see potential to roll that up and move the ships into this new vehicle that you're looking to spin out? Do you see potential to do something else with the MLP to realize more of the value that's stuck there right now? Thanks.
No, we're not planning to roll the ships from the MLP into the new spin-off company at all. I don't think there's anything more that I can comment on the MLP. That's something you can maybe ask Brian if you come on the next call.
I think we are large shareholder in the MLP, from that point of view, we have the same problem as all the other shareholders in the MLP, that the valuation is low and the yield is high. I think there is room for consolidation in the FSRU market. That's certainly something we have always been vocal for. I think it's also a question about getting the contracts extended. Of course, if Hilli is extended, that's a major step forward for GMLP. I think if we can get Spirit out of layup and utilized, that's also a major step forward. I think we're working in order to do commercial sensible deal to increase the cash flow and keep the dividend or grow the dividend. As a new vehicle to acquire things when you're yielding 13% or whatever it is, it's impossible to use it.
Of course, the irony is for some time we've had only short-term contracts in GLNG, and the way we're moving forward now, we're going to have a significant number of long-term contracts that would fit very nicely with the MLP.
Yeah, that's a fair point. Thanks for the time.
Cheers.
Thank you. The next question is from the line of Michael Webber from Wells Fargo. Please go ahead.
Hey, guys. Actually, I had a follow-up. I thought I got back out of the queue, I'll go ahead and ask it since I'm on. You've talked about building out another FLNG project in U.S. Gulf, developing downstream in Brazil. There's no shortage of stuff for you guys to look at, the dividend at the parent level has just always seemed a bit incongruent with the stage of the business. Someone mentioned earlier buybacks. In terms of just the use of that cash, is that something you guys would think about allocating towards an operational purpose sometime over the next handful of quarters, especially with financing all these projects, one of the consistent hurdles?
I think the dividend we have this year is costing $60 million. I think you can discuss is that sustainable or not. It's certainly sustainable today with the cash flow we now have in the system. Of course, we have a lot of CapEx. We also remember what Graham and Dodd defined the stock to. The stock is worth what it over time pays back in dividend. Dividend is important. It covers a lot of fund. I'm not saying that the dividend is at the level where it should be for return, but you know the history of this group. We come from a system where dividend has always been a part of the thing, I think to pay something back to shareholders every year, even if you claim that it's inefficient, if you have to raise capital.
We have been very limited in raising capital over the last years.
Yeah.
I think we try to protect the upside for the shareholders. It is a discussion to be had. We are happy to listening to all the shareholders. I'm a shareholder myself as well.
Mm-hmm. Yep.
I think no decision has been made. I think if we could pay it last year, we can certainly pay it this year, and we can certainly pay it even more next year.
Gotcha. Okay. Thanks, guys.
Thanks, Mike.
Thank you.
Thank you. There were no further questions, so I'll hand back to the speakers.
Thanks, operator. Just in closing, we've taken on your comments to try and simplify the Golar business. On that basis, on the basis that the shipping market recovers, we expect to proceed with the spin-out of the TFDE fleet. This will lead Golar to focus on growth in the FLNG business, which is a strong pipeline of prospects, and importantly, in Golar Power, which is a unique opportunity to use the Golar Nanook as a catalyst to accelerate the displacement of more expensive and more polluting fuels with LNG. It's our intention to continue to build long-term contract earnings backlog, and we believe this will in turn create long-term value for shareholders, and we intend to do that with as much capital discipline as we can. Thank you for your interest in Golar, and we look forward to catching up again next quarter.
Thank you. That does conclude the conference for today. Thank you for participating, and you may now disconnect.