Höegh LNG Partners LP
Q4 2019 Earnings Call Transcript

Published: 27 Feb 2020

[Operator:]

Good day, and welcome to the Höegh LNG Partners Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded.At this time, I'd like to turn the conference over to Steffen Føreid, CEO and CFO. Please go ahead.

[Steffen Føreid:]

Thank you, Allison. Good morning, ladies and gentlemen, and welcome to Höegh LNG Partners Earnings Call for the Fourth Quarter 2019. For your convenience, this webcast and presentation are available on our website. Before we start, please take note of the forward-looking statements on Page 2 and a glossary on Page 3.Turning to Page 4 and the highlights. I'm pleased to report that all units and the fleets performed according to contract and at 100% availability in the quarter. This resulted in total revenues of $38.5 million, a segment EBITDA of $34.6 million and a coverage ratio of 1.1 in the quarter.The partnership distributed $0.44 per common units for the quarter, equivalent to an annualized distribution of $1.76 per common unit. Turning to Page 5, we are putting more numbers to the quarter. Excluding unrealized losses on derivative instruments and foreign exchange, segment EBITDA of $34.6 million in the quarter compared to $37.4 million for the same quarter last year. The decrease is mainly explained by the assessment of $3 million of Indonesian property tax and penalties for the years 2015 through 2019 during the quarter.The assessment is a result of new Indonesian tax regulation defining FSRUs to be subject to the relevant property tax. Limited partners' interest in adjusted net income was $11.2 million in the quarter, which is down from the same quarter last year, mainly due to the property tax. Based on the cash flow of $16.6 million, and a distribution of $0.44 per common unit, the coverage ratio for the quarter was 1.1x.Turning to Page 6. We are showing the development in key measures over time. As you can see from the graphs, key figures were impacted by the Indonesian property tax in the quarter, which, going forward, is expected to be expensed at $150,000 per quarter. Adjusting for the property tax in the quarter and the periodic survey of Höegh Gallant in the second quarter this year, the stability in key figures stand out, underpinning the quarterly distribution of $0.44 per common unit.Turning to Page 7. We are showing the income statement in more detail. Total revenues of $38.5 million in the quarter is up from the same period last year, mainly due to performance claim for Höegh Gallant due to technical issues in the fourth quarter, last year. Vessel operating expenses of $9.2 million in the quarter is up from the same period last year. The increase is mainly due to the Indonesian property tax expense in the quarter, partly offset by repair expenses relating to Höegh Gallant and the technical issues in the fourth quarter last year.Administrative expenses of $2.7 million in the quarter is up from the same quarter last year, mainly due to higher legal and audit fees in the quarter, driven by the first year of an integrated audit and the renewal of the shelf registration. Equity in earnings of joint ventures of $6.6 million in the quarter compared to a loss of $1 million in the same quarter last year. Adjusting for unrealized gains and losses and derivative instruments, the equity and earnings of joint ventures would have been $2.5 million in the quarter compared to $3 million in the same quarter last year. The decline is mainly due to lower reimbursements for project activities in the quarter.Total finance expense of $7.6 million in the quarter is up from the same quarter last year, mainly due to a gain on derivative instruments in the fourth quarter of 2018. Total financial expense include interest expense, which was $6.7 million in the quarter, up $400,000 from the same quarter last year. Increase is mainly due to the amortization of debt issuance costs relating to $385 million facility in the quarter. After taxes of $1.7 million, net income in the quarter was $18.7 million, equivalent to earnings per common units owned by the public and Höegh LNG of $0.44 and $0.47, respectively. The effects from incentive distribution rates is explaining the difference in the numbers.Turning to Page 8. The balance sheet has not changed much since year end 2018. The total liabilities and equity standing at just over USD 1 million at the end of the quarter. The other thing I would like to mention is that, in addition to $39 million in cash and cash equivalents, the partnership had approximately $91 million in undrawn amounts under the 2 revolving credit facilities, taking total liquidity to approximately $130 million at the end of the quarter.Turning to Page 9. We are showing the partnership's platform of 5 modern assets, which have an average remaining contract length of approximately 9.5 years. As already mentioned, all units operated according to contract during the quarter, serving clients at 3 continents. In regards to Höegh Gallant, the partnership has exercised the option to charter the vessels to Höegh LNG for 5 years from the expiry of the current charter and until July 2025, at a rate equal to 90% of the current rate.In regards to Neptune and Cape Ann and the boil-off claim, an agreement has been reached with the charter to settle the boil-off claim at the amount equivalent to the permission. The agreement is subject to final documentation and Höegh LNG will indemnify the partnership for it's share of the cash impact from the agreement.In regards to coronavirus, this has not impacted the partnership so far. However, we are monitoring the situation closely. And should the situation change, we are ready to impose measures to protect our staff and operations. We are, in this respect, having a close dialogue with charters in mitigating risks, relating to the virus, particularly relating to the vessel operating in worldwide trade.Turning to Page 10 and the business development activity at Höegh LNG level. We have split the opportunities in 3 categories

[Operator:]

[Operator Instructions]. Our first question today will come from Chris Wetherbee of Citi.

[James Monigan:]

James on for Chris. Just wanted to actually get a little more context around the Indian tax that you called out. Our understanding whether there was a catch-up component to it. But just wanted to understand what the impact would be moving forward? And if it will be minimal? And is this just something that you're contesting? Or if there's a component that will be recurring as we move forward.

[Steffen Føreid:]

Chris, yes, this is due to new relations that came in force in 2019. So the $3 million we reported this year was a catch-up from 2015 until 2019, relating to the tax and then penalties. Going forward, we expect this to be expensed at $150,000 per quarter. And -- so $600,000 on a annual basis. We are -- we will likely be contesting this, but the final decision, in that respect, has not yet been made.

[James Monigan:]

Got it. And then I just also wanted to touch on the backstop for the Gallant. I think you mentioned that it will be picked -- you have picked up the option and it will begin in April 2020. The confidence in the -- basically, the ability for the obligation to be met, and I believe they're also backstopping the boil-off claim, too, but basically, the confidence in the parent to meet those obligations. And if there is any fallback or maybe any sort of arrangement around the ownership that they have in order -- as an alternative to meeting that? Just wanted to get some context around sort of the risk? And what plans you might have if those are not met?

[Steffen Føreid:]

Yes, as we say, we have now exercised the option. The current charter will expire in April, and then we will go on a 5-year time charter with the parents. The parents -- the ambition is to secure medium-term employment in the carrier mode for Höegh Gallant, for the next 12 to 15 months. Before then, it is expected that it will go on a long-term FSRU contract. So the plan is, first for the parent to employ that as a carrier and then on a long-term FSRU contract. Now as we highlighted in the presentation, the parent is working on several long-term FSRU projects, 3 of which it is selected as the preferred supplier, and others where it is in a final rounds, and where it also has bilateral discussions.So the business development activity is making good progress. And we expect that the parent will be able to deploy all it's open FSRUs on long-term employment over the next few years. And in the meantime, the units will go in the carrier market. Historically, we have seen that the parent has been able to secure employment in the carrier market for medium-term employment, even when the markets have been challenging, which it is today. So we have good confidence that parent will be able to secure employment for the units, including Höegh Gallant, both in carrier and subsequently in FSRU mode.

[James Monigan:]

Got it. And [indiscernible] where there is a rather large delta between what they [indiscernible] and asset carrier and then 90% of backstop that they have, correct?

[Steffen Føreid:]

Yes, that's correct.

[James Monigan:]

Got it. And is there any other way, basically, they could potentially fund that around the discussions of -- or have you had any other discussions on any other arrangement around funding that gap outside of basically their available liquidity?

[Steffen Føreid:]

So that will come out of their available liquidity and cash flow operations. The parent is fully financed. It's in the middle of these days securing refinancing for bonds and also one of it's secured assets at increased leverage. So I think the parent is demonstrating good access to financing and has historically also been able to demonstrate ability to secure employment of unit even in challenging market types.

[James Monigan:]

Okay, fair. And then just separately, just wanted to get a little bit more context around the opportunities in the pipeline, you highlighted a couple, but I wanted to see if there's additional context around where you might see more opportunities emerging, maybe as we think out like beyond 2020 and into like 2021, like the next wave of sort of non-actual projects, but where actual opportunities might occur that are not occurring?

[Steffen Føreid:]

Yes. I think what our market section shows is that, we expect supply of LNG to continue growing, and as we show that the FID is on the exception capacity was record high last year. So we expect the supply of LNG to continue growing, and we expect that to have a positive impact on the pricing of LNG. So we expect the LNG market, in general, to be on a positive trend, with increased LNG, global LNG trade. And that's -- we expect to have a positive impact and demand on FSRU service. So we definitely believe that the market will grow and that more opportunities will arise, as we have secured employment for those projects that we're currently looking at. So longer term, we are very positive to the market and expect the opportunities to increase without me being able to be specific on what projects that would be.

[Operator:]

Our next question today will come from Ben Nolan of Stifel.

[Benjamin Nolan:]

Yes. Great. Just a couple for me. The first is just record-keeping sort of things. I believe you mentioned that the Gallant was scheduled for a special survey in the second quarter? Any other update on how we should think about drydocking?

[Steffen Føreid:]

No, I said -- I made that comment on the -- when I looked at the key figures over time, and I was referring to the drydocking, but Höegh Gallant in the second quarter this year. Sorry.

[Benjamin Nolan:]

So there's nothing -- there's nothing upcoming...

[Steffen Føreid:]

There's no upcoming. I was referring to the...

[Benjamin Nolan:]

Last year.

[Steffen Føreid:]

Right. Off in net's [indiscernible] second quarter 2019 when commenting on the stability of the key figures.

[Benjamin Nolan:]

Got you. Thank you for that clarification. And then the -- my second question is a little bit more related to the broader macro trend in the past 6 months, I think we've seen in unprecedented level of new FSRU developments and awards. Although, they've really been exclusively smaller conversions and things of that sort. Do you think that there is an element of some -- maybe some of those taking share? Or are they completely distinct and separate markets? How do you -- sort of how do you balance the one area being extremely active, while the larger purpose-built FSRUs are -- have -- there's not been as many awards on this?

[Steffen Føreid:]

No, I think it's a further widening of the -- shows a further widening of the market, that there is room for both large scale FSRUs and smaller scale FSRUS, which is a good thing. And this is also a market that we could address with large scale FSRUs, in combination with small scale distribution to other clients. So I think, this is a good sign for the industry as a whole. It's broadening the market, and actually increasing the opportunity also for us in combination with small scale distribution. So I don't think -- I think, they're complementary, and they are not excluding the large scale FSRUS.

[Benjamin Nolan:]

Okay. And then last for me. Just -- I don't believe it came up, but is it relates to sort of Avenir and maybe being able to leverage the FSRU positions that you already have into maybe other small scale distribution or bunkering or anything of that sort, is there -- is it specific to the partnership? Is there any line of sight into a way that, that might be able to enhance the cash flows to the partnership?

[Steffen Føreid:]

I'm not sure if it will be able to enhance cash flow from existing contracts in any material way. And I think the cooperation with Avenir broadens the markets in that we could maybe place an FSRU in a market that otherwise would have a small FSRU. We can place a large FSRU in combination with mobile scale and, thereby, facilitate more drop-down candidates. So I think the small scale is something that broadens the market, and maybe -- could have a positive impact on the drop-down pipeline. But it's not going to have a material impact on the cash flow from existing contracts in the Partnership.

[Operator:]

Our next question today will come from Liam Burke of B. Riley FBR.

[Liam Burke:]

You mentioned your liquidity position, I think it's roughly $120 million. When looking at your drop-down opportunities, your current liquidity, how are you looking at supporting your drop-down schedule?

[Steffen Føreid:]

So if we assume that drop downs will be made when the project pipeline start generating cash flow, so i.e., 2021, 2022, it will -- yes, some -- still some time until that is -- assets that can be drop down to the partnership. I think we would be looking at raising capital to fund such drop down. And if the capital markets or the unit price does not allow us to raise capital at share prices. We could also maybe foresee that the sponsor will take settlement in units. The sponsor does not need growth capital at the moment. It has, for the foreseeable future, enough capacity. So it will take some time until they are in growth mode again. So I think, if the capital market will allow us to raise capital, we would do that. If not, you could foresee that the parent may be take settlement in units, when the next drop down is due. But it's too early to say.

[Liam Burke:]

Great. And it looks like the capacity of -- FSRU capacity globally is starting to normalize, vis-à-vis the demand growth. Do you anticipate down the road and we'll look talking several years that the FSRU construction will begin? Or do you expect this capacity to stay tight for foreseeable future?

[Steffen Føreid:]

No. So again, we have not seen any additional billing orders lately, no new entrants. So our expectation is that, as we lock up capacity for ongoing tender processes, the supply and demand balance -- will balance. At one point in time, then the -- you would -- should expect to see new billing orders again. But that's when we have secured employment for the current assets at the parent level, which currently are being bid for FSRUs. So I think, over time, yes, you will see a balance, and then you will see new billing orders coming in, but not any time soon, I guess.

[Operator:]

Our next question will come from Mark Salsano [ph] of Barclays.

[Unidentified Analyst:]

With respect to the JV performance claim, looks like a settlement is expected to be signed in April. In the past, I think the plan is to potentially look to consolidate those vessels. So just curious if you could provide an update on that?

[Steffen Føreid:]

Yes. I think now we have recent agreement, and we will execute that. And then we will have to look into the consolidation there. I think, the market has changed quite dramatically since last time we talked about that. And that is impacting the attractiveness of doing a deal. So I think, our focus will be on growing through acquisition from the parents rather than consolidating the SRV ownership at the moment.

[Unidentified Analyst:]

Got it. And then just on the demand side, just curious if you've seen any acceleration in customer discussions just given the low commodity price environment? And then with netbacks generally compressing, has there any -- has there been any pressure on rates in those discussions?

[Steffen Føreid:]

Yes. You will notice that the -- on the project pipeline slide, we included this bilateral element this time. And I think it's fair to say that we have -- we are involved in some bilateral discussions. And the client has decided to go bilaterally, rather than to tenders because that is speeding up the process, we believe. So I think we are seeing some good signs that people want to facilitate the swift process until startup. And one way of achieving that is by going directly to bilateral discussion rather than through tender processes. So I think there are some positive signs there, and there hasn't been any big movement in the rate levels on the FSRU side as we see it currently.

[Operator:]

[Operator Instructions]. Our next question will come from Sanjay Ramaswamy of Bank of America.

[Sanjay Ramaswamy:]

Great. Steffan, just interested to hear your thoughts on capital allocation. Obviously, it's been a tough couple of months for MLPs more broadly. But I mean, now the common equity is yielding well over the 14%, 15% range. Just interested to hear your thoughts here on capital allocation, whether we should think more about growing the fleet versus buying back stock and the drop down of assets here?

[Steffen Føreid:]

Yes. I think our focus, going forward, will be to deleveraging, it's a focus area, facilitating growth is another. And then, if the market is not there to support that, maybe the parent could take settlement in units. Yes, it's attractive, it's high yield, but, I think, we will prioritize deleveraging, rather than buying back units at the current stage. I see there could be an interesting investment, but I think that the kind of sequence of how we would use capital, deleveraging and then acquisitions.

[Sanjay Ramaswamy:]

Perfect. That makes sense. And then earlier in your remarks, you mentioned that you haven't seen a broad impact from the coronavirus on activities yet. Just interested to hear whether you think, given the potential likelihood that this extends well into the year, how should we kind of be thinking about the likely impact on the pipeline -- on the project pipeline in Asia?

[Steffen Føreid:]

Well, generally, we know, the projects we are looking at, they are long-term in nature, and the processes take long time. People are traveling a bit less, but it's not really impacting the project we are looking at. It has, obviously, impacted activities in China. That's obvious. But for the projects we are issuing outside China, we haven't really seen any adverse impact on the progress there. As I say, they are long-term in nature, and so -- that's -- but it has impacted activities in China. And hopefully, when the virus is contained there, and the situation goes back to normal, that we will see then increased activity in China again.

[Operator:]

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Mr. Steffen Føreid for any closing remarks.

[Steffen Føreid:]

Okay, Alice, then I would like to thank everyone for attending this presentation. And thank you for your listening in and for your questions. Thank you.

[Operator:]

The conference has now concluded. And we thank you for attending today's presentation. You may now disconnect your lines.