Fitch Ratings has assigned a 'BB-'/'RR4' rating to New Fortress Energy Inc.'s (NFE) senior secured notes.

The secured notes are secured by equity pledges in various subsidiaries and first priority security interests in substantially all other material assets of the issuer and its guarantor subsidiaries. Per Fitch's Corporates Recovery Ratings and Instrument Ratings Criteria, category 2 secured debt can be notched up to 'RR1'/'+2' from the Issuer Default Rating (IDR); however, the instrument ratings have been capped at 'RR4' due to Fitch's Country Specific Treatment of Recovery Rating Criteria. Fitch believes on a normalized run-rate basis most of the revenues will come from outside the U.S.

Net proceeds of the offering will be used to repurchase a portion of the 2025 notes and repay a portion of the outstanding revolver borrowings.

NFE's Long-Term IDR is 'BB-'. The Rating Outlook is Stable.

Key Rating Drivers

Increased Business Risk: The expansion into LNG production increases the business risk profile. LNG production is one of the more complex businesses in the midstream segment, and the first LNG unit will be located offshore in the Gulf of Mexico. Natural gas for the first two FLNG units will come from onshore pipelines in Mexico. These businesses expose NFE to higher operational, execution and regulatory risk than its current line of business, the construction and operation of power plants and LNG infrastructure while supplying LNG under long-term contracts with local utilities and downstream industrial users.

Cash Flow Stability: Other LNG producers, such as Cheniere Energy Inc. (BBB-/Stable), secure long-term, take or pay contracts to support large scale liquefaction units. NFE's strategy involves matching its LNG supply and demand and optimizing open sales to the most economic market. NFE has contracted out a majority of the business and does not incorporate market cargo sales in its projections thereby increasing the stability of its cash flows. The remaining margin comes from the terminals generated under 52 contracts with an average 12-year term and about half paid under a take-or-pay component.

Complex Capital Projects: The capex program has two FLNG units, each a 1.4 mtpa natural gas liquefaction unit, with one mounted on an offshore refurbished oil rig, and the other located onshore Altamira. The first unit was installed in Mexico and is expected to be in production in early 2024. The remaining program includes LNG terminal and power plant projects in Brazil, Nicaragua and Mexico. Fitch believes the company may incur increased construction costs from delays caused by a prolonged ramp-up period for the FLNG units or receipt of full permitting. NFE has secured commitments for $700 million for the construction of the second FLNG unit onshore Altamira, which mitigates financing risk for that project. Any delay pushes back the cash flow growth expected under management's forecast.

Capital Allocation Plan: The annual capital spending was over $3.0 billion in 2023, considerably higher than Fitch's expectations. The capex program was largely funded through FCF and debt, with smaller contributions from asset sale proceeds. NFE paid $683 million dividend paid in January 2023 under the previous policy, which benefited from the 2022 LNG spot market sales during a period of historically high commodity pricing. NFE has since amended the dividend policy at $0.10/share quarterly dividends, with no special dividends going forward. Dividend payments totaled $723.9 million for 2023.

In a lower global LNG price environment, Fitch expects that management will manage capex spending and shareholder returns if there is a cash shortfall.

Operational and Financial Plan: Since 2021, NFE scaled the business through acquisitions and organic growth and has simplified the capital structure. It eliminated vessel level debt by selling some of its LNG vessels to a joint venture, Energos Infrastructure. NFE has sold its 20% ownership in the business in mid-February 2024, however, it continues to guarantee the vessel lease charters. Fitch considers the $2 billion sale leaseback transaction a long-term obligation and includes $1.4 billion as debt. Asset sale proceeds from thermal plants in Brazil and Mexico and the Hilli FLNG vessel fund a portion of the growth projects.

Fitch calculated leverage in 2023 increased to over 5.5x as the overall terminal operating margins were lower than expected, operations of the first FLNG unit was delayed, and short-term LNG market sales were lower. A sizable short-term contract and commodity tailwinds will drive leverage down over the next two years, under Fitch's base case, to below 4.0x. Fitch will look for solid operations of the first FLNG unit, successful deployment of the following units, expansion operations in Puerto Rico for sustained growth.

Counterparty and Country Ceiling Exposure: NFE's IDR is not capped by a country ceiling, as its cash flows from the U.S. (AA+) and Mexico (BBB-/Stable) comfortably cover its hard-currency interest expense. Fitch estimates that through 2025, between 50%-60% of NFE's cash flow will originate from customers in investment-grade countries compared to 10%-20% from non-investment grade customers in Jamaica (B+/Positive), Nicaragua (B-/Positive) and Brazil (BB/Stable).

Derivation Summary

NFE is similar to LNG producer Cheniere Energy Partners LP (Cheniere Energy; BBB-/Stable) as both are operating in the LNG business.

NFE's operational and geographic focus is similar to Cheniere Energy , a global LNG provider. NFE has operations in Miami, Jamaica, Puerto Rico, Mexico, Nicaragua, and Brazil. About half of NFE's cash flow is supported by long-term take-or-pay contracts with utilities and power generators in its operating regions through the sale of LNG and power. NFE's contract tenor are similar to Cheniere Energy, averaging about 15 years for both entities, but has a lower portion of fixed take-or-pay revenues, less geographic diversity and smaller scale than Cheniere Energy, factors which drive the difference in ratings.

Cheniere Energy is a master limited partnership with an LNG import-export facility and a Federal Energy Regulatory Commission regulated interstate natural gas pipeline operating subsidiary, Creole Trail Pipeline LP. Cheniere's consolidated operations are supported by long-term, take-or-pay style contracts for import, export and pipeline capacity, and has a highly leveraged operating subsidiary, Sabine Pass Liquification, LLC (Sabine Pass; BBB+/Stable).

Fitch notes Sabine Pass' contracts are of much more substantial duration than any of its midstream peers, in addition to its primarily fee-based revenue. The contract profile is with investment-grade counterparties, in contrast to NFE has a portion of its counterparties based in non-investment countries. Additionally, Cheniere Energy's contracts are supported by a pass-through of fixed and variable costs of LNG to contractually obligated off-takers unlike NFE, which is exposed to changes in commodity price and offtake volumes.

The majority of NFE's subsidiaries do not have project level debt, while Cheniere's operating subsidiary, Sabine Pass, has substantial leverage, and in a combined and severe downside case of payment default by a large customer and weak merchant price forecast realizations, cash could be trapped.

Leverage for NFE under the Fitch rating case improves to below 4.0x from 2024. Cheniere Energy's leverage is similar with leverage around 4.5x through Fitch's forecast. However, Fitch believes Cheniere has a demonstrated track record in management and completion of complex construction projects and has less construction risk related to debottlenecking and the next planned expansion compared with NFE's pipeline of FLNG, power plants and terminal projects.

Key Assumptions

As per Fitch's price deck, natural gas at Henry Hub (HH) of $3.25/mcf and Title Transfer Facility (TTF) of $12/mcf in 2024; for 2025, HH of $3.00 and TTF of $10.0; for 2026, HH of $2.75 and TTF of $8.0and mid-cycle natural-gas price at HH of $2.75 and TTF of $5.0;

Growth capital spending is largely funded with retained cash and debt;

Dividends and capex in line with public guidance;

Execution of committed growth projects and any additional growth projects annually during the outer years of the forecast.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Long-term fixed price contracts exceeding 60% on a sustained basis with credit worthy counterparties;

Leverage (total debt with equity credit to operating EBITDA) below 4.5x on a sustained basis;

Adequate access to liquidity to meet working capital needs.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Excessive cost overruns for current construction projects;

Leverage (total debt with equity credit to operating EBITDA) above 5.5x on a sustained basis;

Deterioration in counterparty credit quality;

Aggressive cash distribution inconsistent with the company's long-term financing needs;

Long-term fundamentals over depressed international gas prices putting additional pressure the company's cash flow generation.

Liquidity and Debt Structure

As of Dec. 31, 2023, NFE had approximately $155.4 million of unrestricted cash. The company has approximately $155.4 million of restricted cash on its balance sheet restricted to funding of a thermal plant project. As of Dec. 31, 2023, $866.7 million was drawn on the $950.0 million revolving credit facility. The revolving credit facility is almost fully drawn with a maturity is April 2026. The revolving facility comes due approximately 60 days prior to the maturity of 2025 notes, if the said notes are not refinanced in full prior to that date.

As of Dec. 31, 2023, the company is compliant under the covenants required by the LC facility and the revolving credit facility which require it to maintain a debt to capitalization ratio of less than 0.7:1.0, and for quarters in which the revolving facility is more than 50% drawn, the debt to annualized EBITDA ratio of less than 4.0:1.0.

The $200 million term loan due February 2024 was repaid in January 2024. $1.25 billion senior secured notes mature in 2025, and $1.50 billion senior secured notes mature in 2026. As of Dec. 31, 2023, the $191 million of equipment notes are due June 2026.

Issuer Profile

New Fortress Energy LLC is a gas-to-power energy infrastructure company. The company spans the entire production and delivery chain from natural gas procurement and LNG to logistics, shipping, terminals and conversion or development of natural gas-fired generation. It also operates electric generation plants.

Summary of Financial Adjustments

Consolidated leverage for NFE includes asset level debt and the Energos Formation Transaction obligations. Under Fitch's Corporate Criteria, the Energos lease obligations are considered long-term obligations and the reported lease liability is treated as debt. The preferred stock at GMLP is given a 50% equity credit due to its perpetuality and cumulative nature of the dividends and interest.

Date of Relevant Committee

17 March 2023

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

NFE has an ESG relevance score of '4' for Exposure to Environmental Impacts due to potential operational challenges related to extreme weather events in its operating regions. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

(C) 2024 Electronic News Publishing, source ENP Newswire