NET Power Inc. (NYSE:NPWR) Q4 2023 Earnings Call Transcript
NET Power Inc. (NYSE:NPWR) Q4 2023 Earnings Call Transcript March 12, 2024
NET Power Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the NET Power Incorporated’s Fourth Quarter and Year End 2023 Earnings Conference Call. At this time all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. At this time, I will turn the conference over to Bryce Mendes, Director of Investor Relations. Mr. Mendes, you may now begin your presentation.
Bryce Mendes: Good morning, everyone, and welcome to NET Power's fourth quarter and year end 2023 earnings conference call. With me on the call today we have our Chief Executive Officer, Danny Rice; our President and Chief Operating Officer, Brian Allen; and our Chief Financial Officer, Akash Patel. Yesterday, we issued our earnings release for the fourth quarter and year end 2023, which can be found on our Investor Relations website, along with this presentation at ir.netpower.com. During this call, our remarks and responses to questions may include forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with our business. These risks and uncertainties are discussed in our SEC filings. Please note that we assume no obligation to update any forward-looking statements. With that, I will now pass it over to Danny Rice, NET Power's Chief Executive Officer.
Danny Rice: Thanks Bryce. Hi everyone. Thanks for joining us today. I'll provide some thoughts on the encouraging macro setup for NET Power and how it plays into our three pillar corporate strategy. I'll recap 2023 highlights and I'll share what's in store for 2024 and then I'll hand it over to Brian and Akash for operational and financial updates. Starting with the macro, we are continuing to see very positive signals that future load profiles will require more low carbon generation for two distinct but related applications. First generation that can load follow to balance intermittent renewables while in other instances serving as 24X7 clean, reliable power for base load industrial and behind the meter applications. What makes NET Power very attractive is that our power plan is designed to serve both of these growing markets and because low cost natural gas, the feedstock to our patented process, we believe NET Power plants will be the lowest cost option to do so for both.
Anecdotally, our first plant project Permian, which will inevitably and unsurprisingly be the most expensive plant we ever billed, is expected to have our lower levelized cost per kilowatt hour than new nuclear, new geothermal, and new hydro. And as we move from Project Permian to SN2 and into full scale manufacturing mode, we'll expect to quickly begin moving down the CAPEX curve and really begin to differentiate NET Power’s affordability from other forms of reliable clean generation. On the topic of reliable generation, one fairly nascent segment that has gotten the market's attention lately is data centers and hyper scale data centers in particular, given the robust load projections for AI. These data centers are hungry for power, they're expected to become one of the largest segments for load growth in the U.S. through 2030 and beyond, and because our NET Power plants are designed to deliver low cost, low carbon intensity, 24X7 reliable power, we think our product will be the best fit amongst options for this category.
Similar to how we assess all market opportunities, it begins with mapping out where these plants make good sense. The mapping criteria for these bright spots are unique. The mapping layers are existing in plant fiber, geology for sequestration, ambient temperatures to ensure efficient data center cooling needs, and access to natural gas. One of the criteria that's nice to have but not a need to have is proximity to power transmission lines. Given the 24X7 dispatchability we're designing for our plants, we expect we can go off grid and put these data centers where they're best suited. This layered map creates quite a number of interesting bright spots across North America for future NET Power plants for this segment, interestingly, no modifications would be required for our plants.
The initial size we're bringing to market with generation one will be targeting roughly 250 megawatts, so we could see perfect pairing of NET Power plants with a single hyper scale data center. And as you see, these data centers becoming larger up to 750 to a 1000 megawatts, it really lends itself to NET Power's modular design in order to deploy fleets of three to four NET Power plants to match each data center's load. The reason why I mention this market is it really reinforces the importance of our three pillared strategy. First, prove this technology at utility scale. We think the world needs NET Power like no other technology, and the sooner we can prove it, the sooner the world can begin implementing a better pathway to energize and decarbonize.
Second, build the supply chain to quickly scale deployments in manufacturing mode. Because we have such an enviable patent portfolio around our process, it's really only NET Power that can generate low cost clean power for the variety of applications we're pursuing, which means we need to be prepared to deploy our plants at meaningful scale to meet the needs of not just the data center industry, but utilities to meet the base load and load following needs of grid today. And as Brian will touch on in a bit, we're ensuring the partners we pick today have the ability to scale with future demand. And the third pillar is to build a backlog of projects to fully activate the supply chain strategy. And we're going to use our origination strategy to catalyze early adopters of NET Power plants, bring in strategic partners to these projects to accelerate their learning in order to accelerate their own license deployments across their targeted operating areas.
On this last point, we're making good progress on our first originated project OP1 and are actively working on several others, all while advancing discussions with prospective customers across Canada, the U.S., the Middle East, Australia, and Europe for deployments beyond Serial Number 1. Recapping the past year for a minute, 2023 was a pivotal one for NET Power. We raised significant capital through our public listing, which will allow us to develop, improve our technology utility scale. We commenced the feed program for our first utility scale plant, which will be located on Oxy hosts site in West Texas. We added Lummus Technology to fulfill our recuperative heat exchanger supply chain strategy, and we announced development on our first originated project, which we located in the MISO region.
All of these accomplishments are stepping stones towards deploying NET Power plants at mass scale by next decade. In 2024 we have a few key milestones to highlight. First and foremost, we plan to begin the first of four phases of combustor and turbo expander equipment validation at La Porte. In a few moments, Brian will provide additional color on these testing campaigns and why they're so important to validating the equipment and expected performance of SN1 at Project Permian. Second, we expect to complete feeder Project Permian and we'll begin to form the project Strategic Owner group. As a reminder, NET Power considered various federal programs to supplement the funding for SN1, including the DOE grant program. DOE announced the recipients of the grant in December, which didn't include Project Permian.
It's important to note that the goal of Project Permian is to deploy our technology utility scale with safe, reliable operations, and the DOE grant would've required Class 6 sequestration, which due to the specific geology in West Texas adds offtake risk and materially increases sequestration costs to the project. When we first announced Project Permian in 2022, our plan was for NET Power and the Strategic Owner Group to fund our first project. This remains the plan and we expect to announce more details regarding the funding strategy later this year. Our third 2024 expected milestone is to finalize and announce our long-term strategic partner for the Air Separation Unit or ASU, one of the critical components of our cycle. And finally, we'll continue to advance additional NET Power origination projects.
This includes submitting our application for interconnect and Class 6 [indiscernible] OP1 and moving a couple of other origination projects along in order to talk about those locations more publicly. So as we wrap up our first calendar year as a public company, our thesis for NET Power is playing out faster than expected. The world needs clean, affordable, and reliable power, and in my mind, NET Power is the only solution that adequately checks each of those boxes. Because of the patent portfolio around the cycle, we're the only ones who can do it, and so we've got to do it right and we've got to be ready to do it at scale. I couldn't be more excited for what's to come as we continue to develop and deploy a technology the world desperately needs.
So with that, I'll hand it over to Brian for operational updates.
Brian Allen: Thanks Danny. The team continues to make steady progress developing Project Permian and our NET Power technology. On Slide 8, we highlight several key milestones completed in the last few months as well as milestones we plan to achieve in 2024. For Project Permian in the fourth quarter of 2023, we signed our limited notice to proceed or LNTP with Baker Hughes for the release of long lead material for the utility scale turbo expander. Issuing LNTP for the primary turbo machinery of a power project is one of the key critical paths of the overall project schedule and it allows Baker Hughes to release orders to its major material sub-suppliers in support of our schedule. More recently, we initiated engineering work with our selected ASU provider and executed our land lease agreement with Oxy for our plant site in West Texas.
These achievements allow us to remain on schedule for the project with initial power generation expected to occur in the second half of 2027 to the first half of 2028. As Danny mentioned, this year we expect to complete project Permian feed and to form the project consortium. This year, we'll also negotiate key supply and offtake contracts and solidify our financing strategy with our strategic partners and owners. It's important to note that NET Power's capital will be the first dollars into the project, ensuring long leads are secured at the appropriate time to maintain schedule ahead of additional capital commitments by our consortium partners. We will order additional long lead components including the recuperative heat exchanger, and major electrical equipment throughout 2024.
As it relates to technology development in the fourth quarter, we signed our strategic supplier agreement with Lummus Technology, which designates Lummus as the recuperative heat exchanger supplier for NET Power utility scale plants. I'll touch more on this agreement and its significant implications for NET Power in a few slides. This year, we will develop our initial standard plant process design package, a key licensing deliverable that supports future project feeds in a manner that maximizes standardization and drives down plant capital cost. We also intend to secure a long-term strategic supplier agreement with our identified ASU provider, which we view as one of the most important next steps in standing up our long-term supply chain for the major license components of our cycle.
On Slide 9, the validation campaigns of report will follow Baker Hughes established new product introduction and risk mitigation strategies, whereas our previous report testing from 2018 to 2022 was primarily focused on proving our proprietary oxy combustion supercritical CO2 cycle. This upcoming testing will primarily focus on validating and de-risking the Baker Hughes Utility Scale Turbo Expander and how to optimize its operation within our cycle. The ultimate purpose of the demonstration plant and demonstrator campaign is to simulate the nearest conditions possible that the utility scale turbo expander will see at Project Permian. Therefore, the demonstrator turbo expander design, architecture, technology and material selections all seek to replicate as closely as possible that behavior and environment of the utility scale turbo expander.
Equipment validation will follow four primary phases and will continue through 2026. The first phase of testing at La Porte focuses on the turbo expanders burner, which is where combustion of natural gas and oxygen take place in a CO2 environment. We will test multiple oxy fueled burner configurations and Baker will select the best burner heading into the next phase. The second phase of testing will take the down-selected oxy fuel burner from Phase 1 and test it alongside with a combustion liner and other hardware to form a single demonstrator size combustor can. The combustor can's purpose is to deliver the high pressure and high temperature mixture of CO2 and water to power the expander. This testing will allow us to optimize the combustion in full La Porte demonstration conditions.
The third phase of testing will involve scaling the demonstrator size combustor can from Phase 2 to a utility scale can with clusters of burners, and then testing it with a goal of learning and to optimize the design of the utility scale combustor that will operate at Project Permian. The fourth and final phase, will test the full demonstrator turbo expander, including the validation of materials and design architecture used on the turbo expander for Project Permian. Baker Hughes and NET Power will use this testing to tune our analytic and performance simulation models with the acquired test data. We will confirm the demonstrator turbo expander and overall cycle operability and dynamic capability. All of this will allow us to confirm the overall demonstration plant cycle design and plant control system integrated with the Baker Hughes equipment, ensuring that we can minimize residual first of a kind risk prior to a project Permian initial operations.
Turning to Slide 10, our strategic supplier agreement signed with Lummus marks a significant achievement for the continued development of the NET Power cycle. As I mentioned before, Lummus is the designated recuperative heat exchanger supplier for NET Power. Not only do they have an extensive track record of delivering heat exchangers globally, but their 110 plus years of experience in licensing technologies for numerous process industries makes them the ideal partner for NET Power. Lummus has a long history of supporting NET Power technology with an unmatched understanding of the NET Power heat exchanger requirements. As a system integrator, Lummus will leverage its best in class global supply chain of heat exchanger component manufacturers to design and manufacture the most optimal performing and lowest total cost recuperative heat exchanger network for our cycle.
They will also be proactively ramping up their capacity to meet future demand for NET Power plants. This partnership further expands our competitive and IP modes. NET Power will own all cycle, process, and controls IP developed, and Lummus can only sell this proprietary recuperative heat exchanger to NET Power licensees. NET Power will also benefit from receiving licensing revenue on Lummus’ future sales into NET Power plants, as is customary for specialty licensed equipment in the process industry. This agreement is a fantastic partnership for us and we're excited to work with Leon and his team at Lummus. Slide 11 provides an all-encompassing view of our strategic supply chain partnerships that have been formed for the main components of our cycle.
As previously mentioned, we have initiated engineering work with our selected Air Separation Unit provider for Project Permian. We'll look to form a long-term strategic supplier partnership with them this year and announce more details at that time. Another area of focus this year will be establishing our control systems partner. As we evaluate each supplier partnership, we look for win-win opportunities to leverage our partner's most advanced technologies and to further enhance our competitive position and IP mode. So far we, we have been able to find best in class partners that are aligned with our vision of delivering clean, affordable, and reliable energy, and importantly to do so at manufacturing scale. With that, I'll pass it off to Akash for the financial updates.
Akash Patel: Thanks, Brian. Turning to Slide 13, NET Power ended the fourth quarter of 2023 with a strong balance sheet including approximately 637 million of cash and short term investments. For the quarter our total capital expenditures were approximately 8 million, comprised of approximately 5 million capitalized costs associated with the ongoing Project Permian development activities and approximately 3 million spent at La Porte on modifications and upgrades ahead of testing, which is expected to begin this year. Under the current interest rate environment, we continue to benefit from putting our balance sheet cash to work to materially offset our corporate spend. In the fourth quarter our cash flow used in operations was approximately $3 million.
As mentioned last quarter, we expect cash flow used in operations to continue increasing as we build out our organization, progress with joint development program with Baker Hughes and ramp up activity at La Porte. Moving to the right side of Slide 13, we have shown an illustrative use of existing capital through the end of 2027 when we expect initial power generation for our first utility scale project. Of the approximately 637 million on balance sheet, we expect earmarking approximately 200 million for our equity contribution to project Permian, approximately 175 million for the CAPEX and OPEX at La Porte, as well as Baker Hughes joint development agreement, and approximately 265 million towards corporate G&A, origination work, and other expenditures.
NET Power's fully diluted share count was approximately 247 million shares as of December 31, 2023. This was comprised of approximately 212 million Class A and Class B vested shares currently outstanding, 19.5 million shares issuable upon the exercise of outstanding public and private warrants, which will give NET Power an additional $225 million in cash, 1.6 million shares subject to earn out or vesting requirements, and approximately 14 million authorized shares issued both pursuant to the joint development of renewal of Baker Hughes. For a detailed breakdown of our diluted share account, please refer to Notes 10 and 11 of our 10-K. That concludes our prepared remarks. I'll now pass it back to the operator to open up the line for Q&A.
Operator: Thank you. [Operator Instructions]. And our first question will be coming from the line of Noel Parks with Tuohy Brothers. Please proceed with your questions.
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