Höegh LNG Partners LP
Q2 2018 Earnings Call Transcript

Published: 23 Aug 2018

[Operator:]

Good day and welcome to the Hoegh LNG Partners Second 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, Chief Executive Officer and Chief Financial Officer. Please go ahead.

[Richard Tyrrell:]

Thank you, Drew. Good morning ladies and gentlemen, welcome to the Hoegh LNG Partners second quarter 2018 results call. Forward-looking statements on page two and page three, has the glossary as ever. So, may first I ask that you turn to page four where HMLP second quarter highlights are listed. Firstly, HMLP's assets all performed according to contract in the second quarter. Total time charter revenue for the quarter reached $35.5 million compared to $35 million in the same quarter of 2017. The accounts are directly comparable because of the full consolidation of the Hoegh Grace in both periods. The improvement between 2018 and 2017 is primarily down to 100% availability, and no maintenance downtime in the quarter on Gallant, where we typically see a few days maintenance downtime because of the high utilization on that asset. The strong top-line flowed into the highest quarterly segment EBITDA and distributable cash flows reported to-date. The distributable cash flows equated to a coverage of 1.2 times, a level of coverage strength from which the balance sheet genuinely benefits. We have no notable news items in the quarter, but that’s not to say the LNG market was quiet, several long-term supply contracts were announced, and a number of FSRU projects have good tractions. After the quarter end, HMLP paid its $0.44 per common share distribution for the quarter and just under $0.55 per preferred units distribution for the period that was due. The partnership also repaid an additional $6 million on its revolving credit facility that adds to the $11.5 million repays during the quarter. Page number five puts numbers along the quarter. The actual headline revenue was $36.6 million, which is higher than the $35.5 million time charter revenue I referred to in my opening remarks due to the receipt of some insurance premiums -- insurance proceeds that date back to a [mortgage] related claim in 2014. But since these will be repaid to HLNG under the terms of the indemnity payments previously received by HMLP, I view the $35.5 million as being more representative of underlying performance. Reported operating income for the quarter increased to $28.9 million from $23.1 million this time last year. Net income on limited partners’ interest and net income also increased for the quarter to $19.9 million from $12.2 million in the case of net income and to $16.9 million from $9.4 million in the case of limited partners' interest in net income. The year-on-year comparison at the net income level reflects the inclusion of 100% of the Höegh Grace in 2018, compared to 51% in 2017. Like in the third quarter and contrary to the same quarter last year, the income measures are positively affected by the interest rate swaps on our joint ventures that are accounted for according to the equity method above the operating line. Excluding the effect of these, operating income increased $25.9 million from $23.9 million and limited partners’ interest in adjusted net income increased to $13.6 million from $10.9 million, increases of 8.4% and 25% respectively. Segment EBITDA, which includes HMLP’s proportional share of EBITDA from the assets in which it does not own on a 100% interest i.e., the Neptune and the Cape Ann joint ventures and again you see a rise with segment EBITDA increasing to $36.9 million for the second quarter of 2018 from $29.6 million in the second quarter of 2017. The lines below segment EBITDA show reoccurring cash flow items that were excluded from the P&L contributes further to our distribution capacity. I call page six the dashboard slide, and this is where we track the performance of our long-term contracts and it’s where you can see the stability of HMLP’s cash flows. The partnership recorded record quarterly EBIT -- segment EBITDA as can be seen on the top left hand’s chart. And if you take a step back across all the charts, I think stability is clear and it’s that stability which is -- which should backed by our long-term contracts to support our distributions. Another important take away from this page is in the bottom left chart, where you see the distribution coverage increasing to 1.2 times. We have achieved the steady improvement in coverage by growing the partnerships distribution in a conservative manner that prioritize with balance sheets strength. In fact, we are now at under 4.5 times net-debt-to-EBITDA, including relatively highly levered joint ventures, on a proportional ownership basis and under 3.5 times net-debt-to-EBITDA on a consolidated basis. The positive effect of our asset level debt amortizing in this way is that it frees up capacity that becomes availability for future acquisitions. To access such capital, access to the preferred market and our ATM program provide confidence around the availability of future funding for dropdowns and associated growth when they come along. Based on the certain presentation of these current platform five modern high-quality assets, our customers for the Neptune and Cape Ann has become Total after its acquisition of GDF Suez LNG assets. Total is the second largest global LNG player amongst the majors with the worldwide market share of 10%. The Hoegh LNG Group has a longstanding relationship with Total and look forward to this additional custom. The GDF Suez Cape Ann is currently in drydock in advance of serving in India, now remember that she was previously in China. For this reason, there is some volatility in the JV accounts as associated costs run through. Generally speaking, drydocking cost are for the charters account and reimbursed through revenue. However certain upgrades are elective and not reimbursable. The partnership share of these costs will be approximately $1.7 million in 2018, of which approximately $220,000 flowed through in the second quarter. Neptune will incur similar costs of approximately $1.2 million when its next scheduled to be drydocked in 2019. Elsewhere in fleet, meetings are taking place with respect of the Hoegh Gallant’s future in Egypt as highlighted previously. Mutual consent of both parties which required to make any changes of course HMLP has the downside protection on 90% of the current charter rate. Lampung Indonesia and Hoegh Grace in Colombia makes up the balance of the portfolio. Page eight provides additional color on the existing contracts and updates the picture of the HLNG level. HLNG has been successful putting its newbuild FSRUs to work on shorter term contracts with Naturgy and CNOOC. HLNG’s assets need longer contracts to be MLP ready however. And these are things that are being actively sort both in coordination with and independent of the existing charters. The CNOOC contract in China I think is notable for its strategic relevance as it's an exciting market for FSRUs. And certainly looking forward to longer term FSRU contracts rebuilding the dropdown pipeline. But in advance of this I’d like highlight the success at which HLNG is finding work for its FSRUs as either LNGCs -- LNG Carriers that is or in hybrid rails. In addition to be LNGC option being a nice fallback for FSRUs in general, CNOOC’s contract shows how a single customer can use the asset in regas or transportation mode depending on factors such as seasonal demand for gas and its need for transportation for other LNG volumes that are part of this portfolio. Portfolio players I think really value FSRUs on this basis and obviously CNOOC is only one of many portfolio gas players to whom FSRUs are relevant. HLNG's conditional Chilean project is now off the agenda unfortunately. And in addition to the environmental delays, the gas and power market haven't developed as the customer projected and with further delays expected the projects lapsed [ph]. Page number nine provides an update on FSRU demand and the competitive environment. It is highly competitive market for new business. And as a result, I think some softness in the rates should be expected on near-term contract awards. HLNG did miss a piece of business in Brazil, which was disappointing, but elsewhere the activity is coming along nicely. Even though the four projects listed in Australia -- even though there are four projects listed in Australia, only one or possibly two are likely to become reality. And however as was recently reported in the press, HLNG have won the tender and secured exclusivity with Australian International Energy or AIE, which is one of the leading contenders. The AIE project has excellent potential. It is in Port Kembla close to the New South Wales, Victoria border and this enables its [ph] both markets. HLNG has also been shortlisted for another of the leading project in Australia, one that is situated in Victoria. Page number 10, show the income statement for the quarter from our 6-K. The effect on revenue from the insurance proceeds is broken out. Underneath this you can see the costs lines that are slightly improved on this time last year as a result of the quarter being highly stable from operating point of view. Financing costs are trending down as debt monetizes with details on the subsequent slide. Income tax of $1.9 million is slightly below last year’s $2 million, but please remember only a fraction of that is current tax $220,000 to be precise, but the remainder being deferred reimbursable under our contracts and recordable as revenue once it is paid. Preferred unitholders interest in net income appears in this quarter, as a result of the offerings that was used to fund last year's acquisition of the remaining 49% for the Hoegh Grace, a transaction that closed in the fourth quarter. There is also some additional pref issuance that is driving this number. Table [ph] 17 of the financials has the preferred and common unit counts as of June the 30th for those looking to update their models. Page 11 provides additional financial income and expense information. The main purpose for me including this page is to highlight some of the non-cash amortization elements within interest and also highlight the other items which includes foreign exchange effects between realized and unrealized and withholding tax an amount that is payable in cash. Reasonable consistency there across the board with the interest expense coming down as you'd expect, given the amortization of the debt. Turning to page 12, the segment reporting tables and here the comparison is on page 13, we break out how the assets have performed in more detail. But the overall picture is one of a strong quarter from an operational standpoint, with the main driver being the 100% availability of the Gallant as shows up in the majority held column. Our costs in this segment and in the other segments are also lower than in 2017. In case of the other category, which is mainly corporate overhead, we’ve seen a benefit from lower year-end related costs obviously in the second quarter compared to the first and also the absence of any capital markets activities. Some volatility in the costs can be seen at the JV level and this is partly down to the first of the upgrade costs on the Cape Ann preferred to previously and partly down to an elevated level of project costs related to the asset moved to India. Overall segment EBITDA came to $36.9 million and even without the insurance proceeds this would be a pleasing $35.8 million. So I’m now going to jump a couple of pages from page 12 at least to the balance sheet on page 14. And what I’d like to highlight here is a consistency. The year-end 2017 balance sheet was after the closure of the remaining 49% of Hoegh Grace and as you’d expect have been no major changes since this time. What it does show is the steady de-leveraging of the balance sheet look to the long-term debt on the revolving credit facility lines of how this is progressing. And note for the balance on the revolving credit facility line will be further reduced in the next quarter as a result of a $6 million repayment that followed the end of Q2. Page 15 is a reconciliation of distributable cash flow, and it obviously excludes $1.1 million of insurance proceeds that will be returned to HLNG into the indemnity of the amounts that were previously paid to the partnership. It comes to a sum of $18 million in distributable cash flow, which equates to the aforementioned distribution coverage of 1.2 times, which is highest level achieved by the partnership since IPO and something that we’re obviously looking to build and sizing our distribution increase accordingly. With that I’ll turn to the Hoegh LNG Partners investment thesis, which while I think is a little bit slow on the business development side, is very much intact from the assets point of view, certainly from the standpoint of our existing assets. And with that, I’ll open it up to questions. Thank you, Drew.

[Operator:]

[Operator Instructions] The first question today comes from Chris Wetherbee of Citi. Please go ahead.

[Unidentified Analyst:]

Hi, James Donovan on for Chris. I had a question about the boil-off plan 50% $11.9 million. Just wanted to see if I can get some additional detail around that and also sort of gauge what might have caused it to end sort of the possible upside to that $11.9 million?

[Richard Tyrrell:]

Yes, sure. I mean, firstly the $11.9 million you referred to is the reason for the -- what is print on my page at least a bar on the dashboard page. And it’s the reason why I think is that although it flow through the accounts, it is an amount that will be indemnified by the parent, once I should assume it is settled at some level. Now, the claim dates back to the performance of the assets, all that rushes through the assets so Cape Ann and to Neptune, when they were operating as LNG carrier or LNG carriers and that was before the IPO of the MLP and hence the indemnity. So I just wanted to be clear on that, what it is, is that the assets depending on how interpret with the contract, our assets have potentially obviously boiled off more than what they were supposed to and that’s now up for debate. The process has been a bit in limbo during the transition between NG and Total, but I think now Total have closed that transaction. We should be able to come to some kind of agreement on that in relatively short order. But just to repeat again it’s not something will have an impact on the MLP.

[Unidentified Analyst:]

All right. And is the insurance received that were also -- were these related to this particular claim or a different one.

[Richard Tyrrell:]

No actually, it’s different. Those are related to the [indiscernible] which was again a legacy asset, which just flows through the MLPs account because it was in existence before the MLP was formed it was actually something that was sold to the customer, and there is an associated claims. So there is an associated costs of fixing some damage and then there is an associated claim. So when the costs was incurred that was identified by HLNG and since have been successful in the claim, so you are right, that money gets returned.

[Unidentified Analyst:]

Got it. And circling back to the boil-off claim. Do these vessels now have regasification units or any sort of upgrade to them that would prevent them moving forward, or essentially is this not really a risk given their current type of service?

[Richard Tyrrell:]

Well, I mean it’s bit of both, I mean we’ll be out there -- we’re going to take relatively straight forward steps, actually it’s not particularly expensive [indiscernible] so that’s in hand, but it’s not something, it’s not a sort of loss that you incur when you’re operating in absolutely which the assets are currently doing.

[Unidentified Analyst:]

Great. And when you said it’s not particularly expensive, so could you just like a quantum of how expensive it would be in terms of like dollar amount?

[Richard Tyrrell:]

Well it’s a small part of that amount, which I referred to earlier is being sort of the discretionary spend on the Cape Ann and Neptune. But it’s actually only a small part it is the only thing that we're doing on a discretionary basis.

[Unidentified Analyst:]

All right, got it. And also saw with in it, within the press release you also highlight lower OpEx. Just wanted to get a sense of what might have caused that and how much it might continue?

[Richard Tyrrell:]

I think I wouldn't call it particularly material. And I think it's a bit of kind of a betting down effect, because these assets now have been in operation for quite a while. So there is kind of fewer startup related costs these days and perhaps when the assets first started operations with OpEx there are some FX effects because the cruise are typically paid in euros for example. So I think the euro is quite weak at the moment. So that will be part of it as well. And it's something that weren't be necessarily something that will reoccur. So it's a whole mix of things, but in general we've got a big initiative internally to try and get the costs down obviously without impacting the levels of service or maintenance or anything. And it's also slightly the fruits of that program.

[Unidentified Analyst:]

Got it. And then just one more looking forward, what is the particular outlook off-hire?

[Richard Tyrrell:]

On off-hire it's the only asset where we've really have any off-hire has been in the Gallant. And it's been a function of that being limited flexibility in that contract. And the fact it's operating at very close to maximum utilization at all time. So that's -- it's what's driven it, it's typically being 15 days a year on that one asset, elsewhere we haven’t had any off-hire. But still if you're looking at that and over 15 days coming up particular quarter, then I think in the first quarter we have nine days and the hit was about $1 million. So it has an effect and obviously the second quarter wasn’t hit by such an effect and as a result it's [indiscernible].

[Unidentified Analyst:]

Great, thank you.

[Richard Tyrrell:]

You're welcome. Thanks, James.

[Operator:]

The next question comes from Melvin Shieh of Bank of America Merrill Lynch. Please go ahead.

[Melvin Shieh:]

Hey, Richard. Just other quick question on the Gallant, could you give us an update on negotiations with EGAS, perhaps timing around decision. And then more broadly assuming if it falls through views on supply and demand of FSRUs and possible recontracting ops?

[Richard Tyrrell:]

Sure, I'd say that at least at the moment the discussions are quite good spirited. And I'm sure we'll come to something, some kind of agreement. I mean they -- I do want to take down to one FSRU that was clear they have got a lot of gas coming online. So that's their need. And we've obviously got a contract in place. So the question is more one of how they can sort of subsidize the liabilities and it's difficult to see a sort of immediate FSRU project that asset can go to as obviously other FSRUs available in the market that would also be competing for a project of that nature. But the LNG carrier fallback option for FSRUs is obviously not a great option, but it's not a bad option in this LNG carrier market and that's obviously helpful.

[Melvin Shieh:]

Got it, great. And then just quickly -- I'm sorry I got cut off for a little bit. What page did you say the updated unit counts were located on?

[Richard Tyrrell:]

It's -- what did I say, it's in the financials and it is note 17.

[Melvin Shieh:]

Note 17. Great. Thank you, Richard.

[Richard Tyrrell:]

Do a search on that you will find them. You're welcome.

[Operator:]

The next question comes from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

Yes, hi Richard and thank you. I want to follow-up on the Gallant, and can you remind us there is a guarantee from the parent after the expiration of the contract with EGAS. And do you think that this guarantee is solid and it will be paid in cash? Or are there any discussions of potential renegotiating the terms of this contract with the parent?

[Richard Tyrrell:]

No, that is solid, and I think the option kind of comes into play, if the contract is terminated or at the end of the contract, which -- so it's not quite clear exactly when that option will become applicable. I think obviously the latest to become applicable is at the end of the contract, which is in April 2020. And yes, I think, I would certainly assume that. But the MLP would exercise that based upon the current market rates for FSRUs. I think even with a 10% hit it's still going to be an improvement on the next date that asset we will be getting. So, that's how I see it, but there's no question of renegotiating it anything like that something I mean that was sort of major part of the deal and it was the reason why the MLP where they have to pay what it did for that asset.

[Fotis Giannakoulis:]

Fair enough. Thank you very much, Richard. And I want to ask you about are there any potential drop down opportunities right now? I understand that the independence have this difficult legal structure that makes it very hard to drop it down. But is this something that could potentially be resolved any other opportunities for drop downs that you can point out?

[Richard Tyrrell:]

Certainly a few possibilities, which that are not ready to go and offer rebate at the stage, which I think, certainly means that it's difficult to see another drop down this year, not impossible, but difficult. Beyond that we're obviously working very hard to make a few things come together. The independence is possible. The projects in Australia, which the parents have been working on, that one solidifies, is possible. And then there is also a few other things out there which aren’t in the public domain that also would be possible.

[Fotis Giannakoulis:]

Thank you, Richard. And can you also comment about the recent discussion about the Chinese direction U.S. LNG. Do you think that this is going to have any direct impact on the demand for FSRUs and how -- what would be the implications for your sector? Do you see less volume already out of the U.S. towards China? Are there any takeaways from the way that you see the markets?

[Richard Tyrrell:]

I honestly think it’s too early to tell, any kind of noise of this nature is not great clearly. And it could have longer term consequences. But if you look at how the Chinese are going to deal with this in the short-term. They have the option to swap targets they have to take targets from the U.S. those targets are going to Japan and the Chinese can take the Japanese targets. So I think the real question is how this type of noise impact wider energy policy, and their interest in gas. And there are some pretty strong forces, which are in gases favor, which relates to the environment, they relate to its availability. And also when it comes to U.S. gas it’s still clearly the best way for the Chinese to have an impact on their trade imbalance with the U.S. So it’s something that makes sense for China on a standalone basis. And then notwithstanding all this noise could even be part of the solution.

[Fotis Giannakoulis:]

Thank you very much, Richard.

[Richard Tyrrell:]

Thank you, Fotis.

[Operator:]

[Operator Instructions]. The next question comes from Greg Louis of ETIG. Please go ahead.

[Unidentified Analyst:]

Hey, thanks and good afternoon.

[Richard Tyrrell:]

Hello, Greg, how’re you doing?

[Unidentified Analyst:]

I am doing great. Richard, so you didn’t mentioned the Esperanza which recently got its three year contract, is a potential target. As we think about what type of contract coverage is required to make an asset drop down. Is there any kind of hurdle rate we need to think about in terms of whether you think about a backlog or a contract coverage that’s needed to make it a real target?

[Richard Tyrrell:]

I like five years. Of course, you can always say that it depends somewhat on price as well. Because you can potentially adjust this towards downwards to make things work and we do have scope for that without necessarily taking a [bet] on the dropdown. So, I wouldn’t say a five year is a hard and fast rule, but in general I think that’s what’s appropriate for the MLP structure.

[Unidentified Analyst:]

Okay. And just in conversation, you’re still having with the customers, I mean, it just seems like there is a lot of FSRUs in the market, it seems like the contracts are maybe not -- it seems like there is a lot more opportunities to do shorter term contracts based on conversations you’re having. It still seems like there is this more kind of call them five plus year type contracts out in the market. I mean, realizing that we’re in a soft period in the market.

[Richard Tyrrell:]

Yes, I mean, I think some of these shorter term contracts have been sort of opportunistic, I think, HLNG has been playing defense a little bit on those and obviously the fact that there is demand for LNG carriers at a decent price and then some of these portfolio players view these FSRU optionality is being a nice optionality to have is good. But for the core business, of course FSRU projects that generally is longer term. And it goes all the way from 20-year type project where that backed by a 20 years PPA through to projects which are a bit shorter term, because then we’ll bridging other things coming online in nature. So, you’ll always get a range of project duration. But I wouldn’t say for the real proper FSRU project there has been a major shift in the market at all.

[Unidentified Analyst:]

Okay, perfect. Thank you very much for the time.

[Richard Tyrrell:]

Thank you very for the questions.

[Operator:]

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

[Richard Tyrrell:]

Well, thank you ladies and gentlemen for joining the call. I appreciate it, I know it’s still holiday season and all I have got to leave you with is to say all the best for the rest of the summer. Thank you very much.

[Operator:]

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