Höegh LNG Partners LP
Q1 2018 Earnings Call Transcript

Published: 31 May 2018

[Operator:]

Good day and welcome to the Hoegh LNG Partners First Quarter 2018 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Richard Tyrrell. Mr. Tyrrell, please go ahead.

[Richard Tyrrell:]

Thank you, Anita, good morning ladies and gentlemen, and welcome to the Hoegh LNG Partners first quarter 2017 results call. The presentation is available online or by the webcast. On Page 2 and Page 3, please take note of the forward-looking statements and the glossary respectively before turning to the first quarter highlights page on Page 4. In the first quarter, Hoegh LNG Partners FSRUs continue to perform according to contract and delivered strong consistent cash flow. The quarter included a 100% contribution from Hoegh Grace after the dropdown of the 49%, not already owned last December. This expansion enabled us to achieve a record distributable cash flow while growing our quarterly distributions by 2.3% and maintaining a solid level of coverage. The coverage was 1.15 times after the distribution increased to $0.44 per common unit for the quarter. We also commenced another market program for both common and for equity units and at which $10.7 million was raised during the quarter. Of this, $2.8 million was common equity and $7.9 million was pref. The proceeds are for general corporate purposes and will increase our flexibility to balance the various sources of financings for future dropdowns. Page 5 puts numbers on the quarter. Because Hoegh Grace was fully consolidated from when HMLP acquired the first 51% stake at the start of 2017, there is good comparability between the periods, although the swaps, which are finally turned in our favor, do have an impact on the lines where they are included. The time charter revenue for the first quarter of ’18 was 34.9 million compared to 35.1 million in the first quarter of '17. 10 days in maintenance off-hire on the Gallant dragged the revenue down, but this was partially offset elsewhere. Reported operating income increased for the quarter to 30.4 million from 25.7 million this time last year. Net income and limited partner of interest in net income also increased for the quarter to 21.7 million from 16.2 million in the case of net income and to 19 million from 13.4 million in the case of limited partner interest in net income. As mentioned, the income measures were positively impacted by the interest rate swaps, most notably in our joint ventures but are accounted for according to the equity methods above the operating lines. Excluding the effect of these, operating income increased more marginally of 23.9 million from 23.2 million for the same quarter last year while limited partners' interest in adjusted net income rose to 11.8 million from 7.5 million. Segment EBITDA includes HMLP's proportional share of EBITDA from the assets, which it to doe not own an 100% interest, so the Cape Ann and Neptune, this of course because of the addition of the remaining of the 49% of the Hoegh Grace in this quarter’s results and increased to 34.9 million from 29.5 million for the same quarter last year. As in the past, please take a note to the recurring cash flow items that are excluded in the P&L in the lines on this slide below segments EBITDA. Page 6 tracks how the numbers are progressing at the time. The trends are positive. The segment EBITDA has more than doubled since IPO. This quarter includes the four contributions from the remaining 49% of the Hoegh Grace compared to the last quarter where it only contributed for one month. The fourth quarter of ’17 has the effect of tax on the prior quarters and winding follow the finalization of an outage of previously reported. This positive effect was most clearly evidenced in adjusted net income and it goes away this quarter, but we still see good stability and development. Distributable cash flow has reached record levels as would be expected given the recent acquisition of the remaining 49% of the Hoegh Grace and the absence of the minority interest that was being deducted previously. As mentioned, we have 10 days of scheduled maintenance off-hire on the Hoegh Gallant in the quarter and without this, the numbers would have been higher. Still, the 1.15x coverage level shows the increasing ability of HMLP and its growing fleet of contracted assets to withstand such assets specific downside, while still allowing for the modest increased and distribution that was delivered in the quarter follow the accretive -- following the accretive acquisition of the remaining 49% of Hoegh Grace. Turning to Page 7, here we show HMLP's portfolio of increasingly diversified and modern assets. The Neptune continues to serve in Turkey under a subcontract from our customer, a subsidiary of Engie, which will due course move over to Total once the Total acquisition of Engie's LNG business is completed. The second FSRU in the contracts to Engie, the GDF Suez Cape Ann has departed China before dry-docking and readiness for the start of an H-Energy FSRU subcontract in India from the fourth quarter of this year. From a financial perspective, the Cape Ann remains on-hire to Engie over this period with the cost of the dry-docking in principally for Engie's accounts. The Cape Ann has actually already been in India for inauguration ceremony and there is real excitement over its full-time arrival towards the end of this year. The PGN FSRU Lampung remains in its long-term contract in Indonesia after the Hoegh Grace in Colombia. The Gallant, there is a degree of potential downsize related to the increases in Egypt's domestic gas production and the reduction in fleet actually used from 2 to 1. EGAS has requested to start a discussion with Hoegh LNG over terms for the termination of the Gallant contract in advance of its April 2020 maturity. And that's something that would require HLNG consent and compensation. From a HMLP point of view, should HLNG discontinue the charter of Gallant through its Egyptian subsidiary for the purposes of serving the EGAS contract, HMLP has the options to charter the Gallant to HLNG until 2025 at a rate, which is equal to 90% of its current rate. Whether it would in April 2020 or sooner, HMLP current exercised its options. If it does, the impact would negatively impact results over the current levels of distributable cash flow of over $17 million per quarter. The impact will be small enough to maintain a comfortable coverage ratio. Page 8, this is a slide that details our contracts. The existing assets have more than 11 years of contract life remaining on average, which is amongst the best in the sector, if not the best. HMLP has full contracts coverage through to the first quarter of 2025 as a result. From a growth standpoint, FSRU opportunities at the HLNG level do need to crystallize for them to become dropdown candidates for HMLP. There I would say that there have been some unfortunate pieces of missed business and the HLNG -- at the HLNG level, and some of the tendering processes have been lengthier and more complex than initially projected. Nonetheless, I firmly believe that the underlying economic environmental and practical case for delivering LNG through FSRUs remains solidly in place. The assets of the HLNG level, the suitable contracts before becoming dropdown candidates -- but that's not to stay that HLNG has been ineffective of putting it assets to work. Hoegh Giant is in a high-grade HLNG carrier FSRU contract to Gas Natural Fenosa and could become a dropdown candidate, if the customer secures the FSRU contract of this type. Furthermore, HLNG confirmed earlier that the Esperanza is newly delivered assets is trading of LNGC in advance of similar hybrid employment for which terms are agreed. So what's going to turn the page blocks on Slide 8 into maybe blue and tee them for further dropdowns to HMLP. Well, first, let's consider demand and Slide 9 shows the primary reason why LNG demand is increasing and after a much the slides looking at demand as opposed to supply, which will inevitably increase simply because of the new facilities that are coming online. The demand is going up and it's going up because the fuel is clean and cost-effective. Recent long-term LNG contracts have been entered into at approximately 13% of Brent, which is meaningfully below historic levels, so that goes to the cost-effective point. And furthermore, the spot markets developing that seize up a cycle in the price where it fluctuates between oil price equivalents in the winter and pipeline gas prices in the lower demand shoulder period and summer. This spot market is an important development since it further opens up the LNG market for security, supply and seasonal use. And seasonal use is something which we see more and more now with the ever increasing roll that renewables play in the market. LNG, however, when it comes to renewables is something very much a complement to renewable given that it can be turned on a flick of its switch and turned off by the turn of a valve whenever the renewables is available or vice versa. Such increase in demand for LNG is what underpins FSRU demand, and Slide 10 paints a picture of how this demand has developed recently and how it can be expected to develop in future. The Hoegh LNG Group is the largest provider of FSRU in the market, if you include its new building program. Contracts awards have clearly been disappointingly slow in 2018, with a couple of those listed here, the Caribbean one and Bangladesh one, not even being to full size FSRU. So I think that reflects the current slowness of the market, but as also showed on this page on the right-hand side, there is widespread tender activity which reflects the more solid fundamentals. Given the small size of the market, there is a lot of sensitivity to the number of contract awards each year. It will take more than three contracts a year to observe the currently available FSRU; however, unfortunately from HMLP point of view, its long contract that is in a good position to bridge this period. On Page 11, I get back to the numbers in more detail and the income statement. It presents a quarter-on-quarter comparison to the first quarter of 2017. As mentioned previously, there is good comparability here given that we fully consolidated the Hoegh Grace after acquiring 51% at the start of 2017. The comparison shows the consistency in our various measures down to the equity and earnings of joint ventures, where you see the impact of the positive mark-to- market on the interest rate swaps that results from the rising rates over this quarter. The lower interest rates that you see reflect the amortization of debt over the period and then moving down to the tax line. This line includes current tax and low current tax. It's an element which once it becomes current is reimbursed by the charter, which makes it cash flow neutral if not P&L neutral. The non-controlling interest relating to the $0.49 in Grace that was acquired in December 2017 for the latest quarter and the preferred unitholders that financed the acquisition of this interest show up. Of course and there we preferred unitholders interest in net income of $2.66 million can be seen. A little bit of partners interest in net income is up for the quarter including the benefit of swaps and it's still up by over 12% even when the swaps are stripped out. Page 12 has some additional detail on the financial income and expenses. Again, good compatibility and strong consistency between periods can be seen. Segment report on Page 15 provides additional color especially in relation to how the JVs are performing and the levels of corporate overhead. We are running some additional costs preparing the Cape Ann for service in India. Although, this time last year we have similar cost in regards to the startup of the Neptune in Turkey, and overall the joint venture costs are down slightly. Overall, the costs that are running slightly above the usual of the corporate overhead costs, and that's the function of two things; one is the year-end related to legal accounting and stock costs that -- which you've already seen in the first quarter; and secondly, the costs of filing the ATM program which have been expensed in this quarter. They will obviously go away as you already filed the program once. Turning to Page 15, you see a comparison with 2017 -- I am sorry 2014 and 2015 includes the balance sheet. Cash and cash equivalence here can be seen as being up from $22.6 million to $31.4 million and -- but it's principally because of the proceeds of the ATM program. The carrying cost of these proceeds was offset after the end of the quarter through $6.5 million repayment on the revolving credit facility. Excluding any contribution from the JVs that are not consolidated and including the equity contribution. The net debt to EBITDA of this balance sheet is approximately 4.3 times, and we’ve set the distribution in a way that has allowed this to trend downward nicely. The first of all bank facilities matures in [Technical Difficulty].

[Operator:]

Pardon me, there has been a disconnect with the speaker, if you should stay on hold, and he'll be right back. Thank you for your patients. I'd like to introduce Mr. Tyrrell again.

[Richard Tyrrell:]

Thanks Anita. Sorry about that folks. I am not quite sure what happened. But I think I was just getting to the balance sheet when I dropped off. So let me just go through that Page 15 once again. The points that I wanted to make are that the cash and cash equivalents are up this quarter, which is principally because of the proceeds of the ATM program and that, those are the proceeds that have subsequently been used to pay down the revolving credit facility by $6.5 million and that of course offset the carrying cost. This balance sheet also shows that excluding contribution from the JVs and that equity method accounted, so they are off balance sheet. So excluding those including the contributions by way of equity, the net debt to EBITDA can be calculated to the 4.3 times and we have set that distributions in a way that has allowed these measures to trend down nicely, which is intentional because we want to be in a position to attract financing at good levels when the bank facilities start maturing and for us the first bank facility to mature is in the fourth quarter of 2019. So, whether it'd be at that time or in advance, it provides us flexibility and the potential to use the balance sheet to fund at least impart future dropdown. Page 16 is our distributable cash flow page and I am pleased to say that starting to get simpler as the effects of the minority interest in the Hoegh Grace fall away now that we own 100% of the asset. Now starting with segment EBITDA, we include some of the contracted cash flows that are absent in the P&L and excludes the non-cash revenue. The financing lines are adjusted for non-cash interest and other items that playback to the previous financial income and expense page. Tax is a consideration since despite being an MLP and it generally being reimbursed by our customers. We do have local taxes that flow through the account. But taken all those into consideration and of course the distributions to our unitholders which is a present in this quarter, we see that the overall distributable cash to the quarter was $17.255 million which is highest level we’ve achieved since IPO and equates to the 1.15 times coverage ratio based upon our declared distribution to common unitholders of $14.954 million. Considering the 10 days maintenance of Hoegh Gallant, I believe a solid result. As summarized on Page 10, Hoegh LNG partners is the only publicly listed pure player of FSRU. The rapidly growing supply of clean and expensive LNG is driving demand and FSRU adoption. Our modern assets provide critical energy infrastructure. Our portfolio of long-term contracts supports cash flow stability and strong distribution coverage. And then last but not least, we do look for towards accretive dropdown from our very supportive GP as having the potential to drive distribution growth overtime. On that note, I’m more than happy to take any questions. Anita would you be kind enough to open the mics.

[Operator:]

Yes, we will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Chris Wetherbee with Citi. Please go ahead.

[Chris Wetherbee:]

Just wanted to actually ask about your distribution target and the coverage ratio? It's picked up comfortably. I wanted to know that what the long-term thoughts around that would be and what it would take to see a larger increase in distribution?

[Richard Tyrrell:]

You're right. It has ticked up. I’d say that it’s picked up from relatively skinny levels. So, by design I think in general I think investors are wanting to see good levels of coverage and I think we’re trying to deliver on those, on those preferences. I mean of course we are dropdown models, so how much we increase it that will be function of exactly how quickly we can execute dropdowns. And I’d say that’s where there is lack of clarity right now. We do need a few of these assets which are up at the HLNG level to see that contracts crystallize and that’s what drive the whole sort of dropdown engine and allow for increase in distribution. So while we probably got three possible sort of scenarios at the HLNG level and could see a dropdown. We’re trying to figure out exactly when is tough, but I'd still say that I’d be disappointed if we couldn’t dropdown at least once in a year. Although, as you’ve seen previously when we dropdown, the second half of Grace, we did sort of -- we were quite conservative with our distribution exists.

[Chris Wetherbee:]

And then a follow-up to that. You've brought up the point about strengthening market and taking more than like actually three contracts a year to absorb capacity. What -- like looking forward essentially, what do you think it would take to actually to revolve that capacities sort of on and through the backlog to a point where you might see longer contracts and the distribution pipeline strengthen?

[Richard Tyrrell:]

Yes, first thing I’d say is I wouldn't say contract length is necessarily a function of excess supply in the market. I think contract length is or at least not die directly. I think from a customer point of view you’ve got some customers for example in China where their preference is to go for short contracts and then you've got other customers who are looking to use an FSRU to -- well, as part of a vertically integrated value chain, which is supported by 20 year PPA, and they will want to match the contracts on the contract length on the FSRU to the contract lengths on their PPA. So, if anything, the contract length is not customer driven. To a certain extent, it is supplier driven because the market being little bit oversupplied at the moment. I think HLNG will probably be reluctant to enter into long-term contracts at a very low level. But to answer the other side of that question which relates to what would it take the small market. So, I always said it was kind of maybe a three to four year type market and it's been towards the bottom end of that range and hence the oversupply that we currently see. However, it was all of a sudden or if we were to see flight of awards that would probably very much change the picture because it would knock off the competition effectively. And that's what it would take. So it's not out of reach in my view.

[Chris Wetherbee:]

Great, thanks. And then just one small, very smaller question about the ATM. Sort of what are your plans longer term plans during on that, if the 120 authorized and so far what point are you comfortable with and sort of what sort of cadence could we possibly see in the future?

[Richard Tyrrell:]

Yes, on the ATM programs when you file them they are -- they stay open for 3 years after that one filing. So you always try and size it with that in mind. Yes, we won't be raising that sort of amount without having a drop-down ready to go, but we are raising preemptively if you like it at the moment on an opportunistic basis.

[Operator:]

[Operator Instructions] The next question comes from Melvin Shieh with Bank of America Merrill Lynch. Please go ahead.

[Melvin Shieh:]

This is Melvin filling in for Ken Hoexter. Could you just talk a little bit about the Gallant of Egypt tell us sort of what are the options beside resorting to the obligation with parent co?

[Richard Tyrrell:]

Sure, I mean -- I sort of viewed for a while now that's based on the current rates that we see in the markets. Once that assets went off contracts in Egypt, there is a pretty high likelihood that with we end up resorting to that, that option just simply because how rates have moved. Now of course that doesn't mean that parent co going to be reaching into the pocket for the multiple amounts. So, they're going to be sort of substantially offsetting that by, hopefully, another FSRU contracts, but it's not some LNG carrier revenue. And of course, these assets are perfectly capable of competing in that market. So, what are the options, the options are that it stays in Egypt. And for the form of the modern FSRU or it goes elsewhere as an FSRU or sort of like the worst case scenario trades as a LNG carrier. And this at a shortfall is met by Hoegh LNG.

[Melvin Shieh:]

And then, yes, it’s a work of trade as a LNG carrier, so would you anticipate that based on real market conditions?

[Richard Tyrrell:]

Well, the head of the MLP level to be very clear on that we have head of 10% revenue. And if you think about it, we have 10 days on hire on that vessel this quarter and there were 90 days in the quarter. So that must be just above 10%, so this type hit you would see is broadly in line with what you saw anyway in this quarter. Hopefully that answers your question.

[Operator:]

The next question comes from Sunil Sibal with Seaport Global. Please go ahead.

[Sunil Sibal:]

So, just wanted to go back to the Slide 10 in terms of where you laid out comparative environment. So seems like you know when I look at the right most column, there about 12 kind of tenders in work so as to say, right, in that list. I was just curious in terms of the timeline on that, is there a good way to handicap all of those 12 -- how much could be -- how many would --could be decided this year versus over the next year or year and a half?

[Richard Tyrrell:]

2 to 3.

[Sunil Sibal:]

So 2 to 3 this year, you are saying?

[Richard Tyrrell:]

And 6 to 7, yes. 2 to 3 this year and 6% to 7% between now and the next year and half.

[Sunil Sibal:]

And then when you see 2 to 3 this year, they necessarily won’t startup in 2018, right, from a contractual perspective?

[Richard Tyrrell:]

No, that's right. I mean exactly when these contracts start depends very much on the nature of the contracts and you have shortest lead time is 5 months, I think is a record and the longest if it’s part of the integrated project 19 months, two years.

[Sunil Sibal:]

Okay got it. And I just wanted to, so it seems like from that perspective, anything coming your way or anything coming the parent's way in 2018 is probably going to be a little bit of a long stock. So when think about that and you commented that you would be disappointed if you don’t get one dropdown every year. How do I kind of reconcile those situations?

[Richard Tyrrell:]

Yes, I mean I think in 2018, yes, there is a few possibilities, but I wouldn’t say them. I wouldn’t call them probability just yet or that's one of possible right now rather than probable maybe. It’s a better way putting that. So, I could end up being disappointed in 2018, but I certainly hope to back in track for 2019 and early in 2019.

[Sunil Sibal:]

Got it, okay and then on independence any update on consent from the charter on that? How should we kind of think about it, any time line on that.

[Richard Tyrrell:]

I’d say that’s one of the possible but not yet one of the probable.

[Sunil Sibal:]

Is there any time marker that we should be thinking about when the decision is going to be made? Or is this like a continuing discussion with the charter and decision can be made anytime?

[Richard Tyrrell:]

No, I think it's impossible to put a time line on it.

[Operator:]

This concludes our question-and-answer session. I would like to hand the conference over to -- back over to Richard Tyrrell for any closing remarks.

[Richard Tyrrell:]

Well, thanks everybody for joining, and if is there any follow-up, I’ll be at Marine Money for the Morgan Stanley day and generally around in that region New York. So, if anyone would like to follow-up in person then or just call me in the meantime, I'm happy to take any further questions as they come to mind. Thanks Anita.

[Operator:]

Thank you. This conference is now concluded. Thank you for attending for today’s presentation. You may now disconnect.