Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report on Form 10-Q, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate,” “contemplate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “might,” “will,” “would,” “could,” “should,” “can have,” “likely,” “continue,” “design” and other words and terms of similar expressions, are intended to identify forward-looking statements.
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs.
Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ from those expressed in our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties, including those described in the section titled “Risk Factors” in our most recent Annual Report on Form 10-K. You should consider our forward-looking statements in light of a number of factors that may cause actual results to vary from our forward-looking statements including, but not limited to:
|
●
|
progress in the development of our liquefied natural gas (“LNG”) liquefaction and export projects and the timing of that progress;
|
|
●
|
government approval of construction and operation of the terminal at the Port of Brownsville in southern Texas (the “Terminal”) and an associated 137-mile pipeline to supply gas to the Terminal (the “Pipeline” and together with the Terminal, the “Project”) and the timing of that approval;
|
|
●
|
the successful completion of the Project by third-party contractors;
|
|
●
|
our ability to secure additional debt and equity financing in the future to complete the Project;
|
|
●
|
the accuracy of estimated costs for the Project;
|
|
●
|
statements that the Project, when completed, will have certain characteristics, including amounts of liquefaction capacities;
|
|
●
|
the development risks, operational hazards, regulatory approvals applicable to Rio Grande’s and Rio Bravo’s construction and operations activities;
|
|
●
|
our anticipated competitive advantage and technological innovation which may render our anticipated competitive advantage obsolete;
|
|
●
|
the global demand for and price of natural gas (versus the price of imported LNG);
|
|
●
|
the availability of LNG vessels worldwide;
|
|
●
|
negotiations for the Terminal site lease and right-of-way options for the Pipeline route;
|
|
●
|
changes in legislation and regulations relating to the LNG industry, including environmental laws and regulations that impose significant compliance costs and liabilities;
|
|
●
|
risks related to doing business in and having counterparties in foreign countries;
|
|
●
|
our ability to maintain the listing of our securities on a securities exchange or quotation medium;
|
|
●
|
changes adversely affecting the business in which we are engaged;
|
|
●
|
general economic conditions;
|
|
●
|
our ability to generate cash;
|
|
●
|
compliance with environmental laws and regulations; and
|
|
●
|
the result of future financing efforts and applications for customary tax incentives.
|
Should one or more of the foregoing risks or uncertainties materialize in a way that negatively impacts us, or should the underlying assumptions prove incorrect, our actual results may vary materially from those anticipated in our forward-looking statements, and our business, financial condition, and results of operations could be materially and adversely affected.
The forward-looking statements contained in this Quarterly Report on Form 10-Q are made as of the date of this Quarterly Report on Form 10-Q. You should not rely upon forward-looking statements as predictions of future events. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements.
Except as required by applicable law, we do not undertake any obligation to publicly correct or update any forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in our most recent Annual Report on Form 10-K as well as other filings we have made and will make with the Securities and Exchange Commission (the “SEC”) and our public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.
Overview
NextDecade Corporation is a LNG development company focused on LNG export projects and associated pipelines in the State of Texas. We have focused and continue to focus our development activities on the Project and have undertaken and continue to undertake various initiatives to evaluate, design and engineer the Project that we expect will result in demand for contracted capacity at the Terminal, which would allow us to seek construction financing to develop the Project. We believe the Project possesses competitive advantages in several important areas, including, engineering, commercial, regulatory, and gas supply. We submitted a pre-filing request for the Project to the FERC in March 2015 and filed a formal application with the FERC in May 2016. We also believe we have robust commercial offtake and gas supply strategies in place and we estimate that the Project could commence commercial operations as early as 2023.
Unless the context requires otherwise, references to “NextDecade,” “the Company,” “we,” “us,” and “our” refer to NextDecade Corporation and its consolidated subsidiaries.
Recent Developments
Common Stock Purchase Agreement
On October 24, 2019, the Company entered into a Common Stock Purchase Agreement (the “Stock Purchase Agreement”) with Ninteenth Investment Company LLC, an affiliate of Mubadala Investment Company PJSC (the “Purchaser”), pursuant to which the Company agreed to sell, and the Purchaser agreed to purchase, an aggregate of $50.0 million of shares of the Company common stock. The offering of such shares of Company common stock (the “Offering”) and the other transactions contemplated by the Stock Purchase Agreement closed on October 28, 2019. At closing, the Company received proceeds of $50.0 million and issued 7,974,482 shares of Company common stock to the Purchaser.
For additional details on the Offering and the transactions in connection therewith, please refer to our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 24, 2019.
Significant Events
LNG Sale and Purchase Agreement
In March 2019, we entered into a 20-year sale and purchase agreement (the “SPA”) with Shell NA LNG LLC (“Shell”) for the supply of two million tons per annum of liquefied natural gas from the Terminal.
Pursuant to the SPA, Shell will purchase LNG on a free-on-board basis starting from the commercial operation date of the Terminal, currently expected in 2023, with approximately three-quarters of the purchased LNG volume indexed to Brent and the remaining volume indexed to domestic United States gas indices, including Henry Hub.
The Shell SPA becomes effective upon the satisfaction of certain conditions precedent, which include a positive final investment decision (“FID”) in the Project.
Rio Grande Site Lease
On March 6, 2019, Rio Grande entered into a lease agreement with the Brownsville Navigation District of Cameron County, Texas (“BND”), pursuant to which Rio Grande has agreed to lease approximately 984 acres of land situated in Cameron County, Texas for the purposes of constructing, operating, and maintaining the Terminal.
The initial term of the lease is for 30 years (the “Primary Term”), which will commence on the date specified in a written notice by Rio Grande to BND (the “Effective Date Notice”), if given, confirming that Rio Grande or a Rio Grande affiliate has made a FID for the first phase of the Terminal. The Effective Date may be no later than November 6, 2019, subject to certain exceptions. Rio Grande has the option to renew and extend the term of the lease beyond the Primary Term for up to two consecutive renewal periods of ten years each provided that it has not caused an event of default under the lease.
Engineering, Procurement, and Construction Contract
During the third quarter of 2018, we initiated a competitive engineering, procurement and construction (“EPC”) bid process. We received expressions of interest (the “EOIs”) from multiple EPC contractors to participate in the EPC bid process. We reviewed the EOIs against a series of selection criteria and issued formal invitations to bid to Bechtel Oil, Gas, and Chemicals, Inc. (“Bechtel”), Fluor Corporation (“Fluor”) and McDermott International, Inc. (“McDermott”).
On April 22, 2019, we received EPC bid packages from each of Bechtel and Fluor, two of the global LNG market’s leading EPC contractors. The technical and commercial bid packages, which were received on-schedule, were for fully wrapped lump-sum separated turnkey (“LSTK”) EPC contracts for the Terminal.
On May 24, 2019, we entered into two LSTK EPC agreements with Bechtel for the construction of (i) two LNG trains with expected aggregate production capacity up to approximately 11.74 million tonnes per annum (“mtpa”), two 180,000m3 full containment LNG tanks, one marine loading berth, related utilities and facilities, and all related appurtenances thereto, together with certain additional work options (the “Trains 1 and 2 EPC Agreement”) and (ii) an LNG train with expected production capacity of up to approximately 5.87 mtpa, related utilities and facilities, and all related appurtenances thereto (the “Train 3 EPC Agreement” and together with the Trains 1 and 2 EPC Agreement, the “EPC Agreements”). We agreed to pay to Bechtel a contract price of $7.042 billion for the work under the Trains 1 and 2 EPC Agreement and a contract price of $2.323 billion for the work under the Train 3 EPC Agreement. Bechtel will perform limited notice to proceed (“LNTP”) activities until January 1, 2020 and agreed to accept approximately 2.1 million shares of Company common stock as payment for LNTP activities.
Series B Convertible Preferred Stock Purchase Agreements
On May 24, 2019, pursuant to the Series B Convertible Preferred Stock Purchase Agreements, dated as of May 17, 2019 (the “Series B Stock Purchase Agreements”), with (i) York Tactical Energy Fund, L.P. and York Tactical Energy Fund PIV-AN, L.P., (ii) First Series of HDML Fund I, LLC, Bardin Hill Event Driven Master Fund, LP, and HCN LP, (iii) Valinor Capital Partners, L.P. and Valinor Capital Partners Offshore Master Fund, L.P and (iv) HGC NEXT INV LLC we sold an aggregate of $20.945 million of shares of the Company’s Series B Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), together with associated warrants. Such warrants represent the right to acquire approximately 30 basis points (0.30%) in the aggregate of the fully diluted shares of all outstanding shares of Company common stock on the exercise date with a strike price of $0.01 per share.
Receipt of Final Environmental Impact Statement
On April 26, 2019, we received our final environmental impact statement (“FEIS”) from the FERC for the Terminal and the Pipeline. The FEIS was prepared in compliance with the requirements of the National Environmental Policy Act (“NEPA”), the Council on Environmental Quality regulations for implementing NEPA, and FERC regulations.
U.S. Fish and Wildlife Service Final Biological Opinion
On October 1, 2019, the U.S. Fish and Wildlife Service issued the final biological opinion to the FERC, concluding that the construction of the Project will not likely jeopardize the continued existence of the ocelot or the Gulf coast jaguarundi.
Liquidity and Capital Resources
Capital Resources
We have funded and continue to fund the development of the Project and general working capital needs through our cash on hand and proceeds from the issuance of equity. Our capital resources consisted of approximately $3.8 million of cash and cash equivalents and $40.4 million of investment securities as of September 30, 2019.
Sources and Uses of Cash
The following table summarizes the sources and uses of our cash for the periods presented (in thousands):
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Operating cash flows
|
|
$
|
(33,283
|
)
|
|
$
|
(12,646
|
)
|
Investing cash flows
|
|
|
13,785
|
|
|
|
(66,560
|
)
|
Financing cash flows
|
|
|
20,170
|
|
|
|
77,383
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
672
|
|
|
|
(1,823
|
)
|
Cash and cash equivalents – beginning of period
|
|
|
3,169
|
|
|
|
35,703
|
|
Cash and cash equivalents – end of period
|
|
$
|
3,841
|
|
|
$
|
33,880
|
|
Operating Cash Flows
Operating cash outflows during the nine months ended September 30, 2019 and 2018 were $33.3 million and $12.7 million, respectively. The increase in operating cash outflows during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 was primarily related to invitation to bid contract costs, additional employees, increased professional fees and travel costs, and increased marketing and conference sponsorship costs.
Investing Cash Flows
Investing cash inflows (outflows) during the nine months ended September 30, 2019 and 2018 were $13.8 million and $(66.6) million, respectively. The investing cash inflows during the nine months ended September 30, 2019 were primarily the result of the sale of $48.5 million of investment securities partially offset by cash used in the development of the Project of $18.6 million and the purchase of investment securities of $16.1 million. The investing cash outflows for nine months ended September 30, 2018 were primarily the result of cash used in the development of the Project of $11.5 million and the purchase of investment securities of $55.1 million.
Financing Cash Flows
Financing cash inflows during the nine months ended September 30, 2019 and 2018 were $20.2 million and $77.4 million, respectively. For the nine months ended September 30, 2019 financing cash inflows were primarily the result of the sale of Series B Preferred Stock for $20.9 million partially offset by $0.7 million of common stock repurchased related to share-based compensation. For the nine months ended September 30, 2018 financing cash inflows were primarily the result of $79.1 million of proceeds from the issuance of preferred equity offset by $1.7 million of equity issuance costs.
Capital Development Activities
We are primarily engaged in developing the Project, which will require significant additional capital to support further project development, engineering, regulatory approvals and compliance, and commercial activities in advance of a FID made to finance and construct the Project. Even if successfully completed, the Project will not begin to operate and generate cash flows until at least several years from now, which management currently estimates being as early as 2023. Construction of the Project would not begin until, among other requirements for project financing, the FERC issues an order granting the necessary authorizations under the Natural Gas Act and once all required federal, state and local permits have been obtained. We estimate that we will receive all regulatory approvals and begin construction to support the commencement of commercial operations as early as 2023. As a result, our business success will depend, to a significant extent, upon our ability to obtain the funding necessary to construct the Project, to bring it into operation on a commercially viable basis and to finance our staffing, operating and expansion costs during that process.
We have engaged SG Americas Securities, LLC (a business unit of Société Générale) and Macquarie Capital (USA) Inc. to advise and assist us in raising capital for post-FID construction activities.
We currently expect that the long-term capital requirements for the Project will be financed predominately through project financing and proceeds from future debt and equity offerings by us. There can be no assurance that we will succeed in securing additional debt and/or equity financing in the future to complete the Project or, if successful, that the capital we raise will not be expensive or dilutive to stockholders. Additionally, if these types of financing are not available, we will be required to seek alternative sources of financing, which may not be available on terms acceptable to us, if at all.
Contractual Obligations
There have been no material changes to our contractual obligations from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, except for our obligation of $25.3 million at September 30, 2019 for limited notice to proceed activities as compared to zero at December 31, 2018 and our obligation of $7.7 million at September 30, 2019 for wetland and habitat mitigation measures as compared to zero at December 31, 2018.
Results of Operations
The following table summarizes costs, expenses and other income for the periods indicated (in thousands):
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
|
2019
|
|
|
2018
|
|
|
Change
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
General and administrative expense
|
|
|
3,579
|
|
|
|
6,214
|
|
|
|
(2,635
|
)
|
|
|
10,405
|
|
|
|
25,533
|
|
|
|
(15,128
|
)
|
Invitation to bid contract costs
|
|
|
-
|
|
|
|
4,418
|
|
|
|
(4,418
|
)
|
|
|
10,163
|
|
|
|
4,418
|
|
|
|
5,745
|
|
Land option and lease expense
|
|
|
754
|
|
|
|
297
|
|
|
|
457
|
|
|
|
1,750
|
|
|
|
797
|
|
|
|
953
|
|
Depreciation expense
|
|
|
80
|
|
|
|
50
|
|
|
|
30
|
|
|
|
164
|
|
|
|
127
|
|
|
|
37
|
|
Operating loss
|
|
|
(4,413
|
)
|
|
|
(10,979
|
)
|
|
|
6,566
|
|
|
|
(22,482
|
)
|
|
|
(30,875
|
)
|
|
|
8,393
|
|
Gain (loss) on common stock warrant liabilities
|
|
|
873
|
|
|
|
83
|
|
|
|
790
|
|
|
|
(965
|
)
|
|
|
83
|
|
|
|
(1,048
|
)
|
Interest income, net
|
|
|
319
|
|
|
|
222
|
|
|
|
97
|
|
|
|
1,193
|
|
|
|
475
|
|
|
|
718
|
|
Other
|
|
|
(7
|
)
|
|
|
(6
|
)
|
|
|
(1
|
)
|
|
|
264
|
|
|
|
(45
|
)
|
|
|
309
|
|
Net loss attributable to NextDecade Corporation
|
|
|
(3,228
|
)
|
|
|
(10,680
|
)
|
|
|
7,452
|
|
|
|
(21,990
|
)
|
|
|
(30,362
|
)
|
|
|
8,372
|
|
Preferred stock dividends
|
|
|
(2,849
|
)
|
|
|
-
|
|
|
|
(2,849
|
)
|
|
|
(7,821
|
)
|
|
|
-
|
|
|
|
(7,821
|
)
|
Deemed dividends on Series A Convertible Preferred Stock
|
|
|
(286
|
)
|
|
|
(271
|
)
|
|
|
(15
|
)
|
|
|
(1,324
|
)
|
|
|
(271
|
)
|
|
|
(1,053
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(6,363
|
)
|
|
$
|
(10,951
|
)
|
|
$
|
4,588
|
|
|
$
|
(31,135
|
)
|
|
$
|
(30,633
|
)
|
|
$
|
(502
|
)
|
Our consolidated net loss was $3.2 million, or $0.06 per common share (basic and diluted), for the three months ended September 30, 2019 compared to a net loss of $10.7 million, or $0.10 per common share (basic and diluted), for the three months ended September 30, 2018. The $7.5 million decrease in net loss was primarily a result of decreased invitation to bid contract costs and a decrease in general and administrative expense discussed separately below.
Our consolidated net loss was $22.0 million, or $0.29 per common share (basic and diluted), for the nine months ended September 30, 2019 compared to a net loss of $30.4 million, or $0.29 per common share (basic and diluted), for the nine months ended September 30, 2018. The $8.4 million decrease in net loss was primarily a result of a decrease in general and administrative expense discussed separately below, partially offset by an increase in invitation to bid contract costs and loss on common stock warrant liabilities.
General and administrative expense during the three months ended September 30, 2019 decreased $2.6 million compared to the same period in 2018 primarily due to a decrease in share-based compensation expense of $6.2 million partially offset by an increase in expenses related to additional employees, increased professional fees and travel costs, and increased marketing and conference sponsorship costs. The decrease in share-based compensation expense is primarily a result of forfeitures of restricted stock during the three months ended September 30, 2019.
General and administrative expense during the nine months ended September 30, 2019 decreased $15.1 million compared to the same period in 2018 primarily due to a decrease in share-based compensation expense of $25.3 million partially offset by an increase in expenses related to additional employees, increased professional fees and travel costs, and increased marketing and conference sponsorship costs. The decrease in share-based compensation expense is primarily a result of forfeitures of restricted stock during the nine months ended September 30, 2019.
For the three and nine months ended September 30, 2019, we incurred approximately zero and $10.2 million, respectively of invitation to bid contract costs as a result of our receipt of bid packages from Bechtel and Fluor and the execution of the EPC Agreements with Bechtel discussed under Significant Events above, compared to $4.4 million of invitation to bid contract costs incurred during each of the same periods in 2018.
The gain on common stock warrant liabilities of $0.9 million for the three months ended September 30, 2019 is primarily due to an decrease in the share price of Company common stock from December 31, 2018 to the re-measurement date at September 30, 2019 as compared to a $0.1 million gain during each of the three and nine months ended September 30, 2018 due to a decrease in the share price of the Company common stock from the initial valuation dates to September 30, 2018.
Loss on common stock warrant liabilities of $1.0 million for the nine months ended September 30, 2019 is primarily due to an increase in the share price of Company common stock from December 31, 2018 to the re-measurement date at September 30, 2019.
Interest income, net during the three and nine months ended September 30, 2019 increased $0.1 million and $0.7 million, respectively, compared to the same periods in 2018 due to increased yield and higher average balances maintained in our cash, cash equivalent and investment securities accounts.
Preferred stock dividends for the three and nine months ended September 30, 2019 of $2.8 million and $7.8 million, respectively, consisted of dividends paid-in kind to holders of Series A Convertible Preferred Stock, par value $0.0001 per share (the “Series A Preferred Stock”), and Series B Preferred Stock. There were no dividends declared to the holders of Series A Preferred Stock or Series B Preferred Stock during the three or nine months ended September 30, 2018.
Deemed dividends on the Series A Preferred Stock for the three and nine months ended September 30, 2019 represents the accretion of the beneficial conversion feature associated with the Series A Preferred Stock issued in the third quarter of 2018.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of September 30, 2019.
Summary of Critical Accounting Estimates
The preparation of our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make certain estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. There have been no significant changes to our critical accounting estimates from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
Recent Accounting Standards
For descriptions of recently issued accounting standards, see Note 13 – Recent Accounting Pronouncements of our Notes to Consolidated Financial Statements.