Höegh LNG Partners LP
Q3 2018 Earnings Call Transcript

Published: 29 Nov 2018

[Operator:]

Good day. And welcome to the Höegh LNG Partners Third Quarter 2018 Results Conference Call. All participants will be in a 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 Steffen Føreid, CEO and CFO of Höegh LNG Partners. Please go ahead.

[Steffen Føreid:]

Thank you, Nicole. Good morning, ladies and gentlemen. And welcome to Höegh LNG Partners Third Quarter 2018 Earnings Call. For your convenience, these webcasts and presentation are available on our Web site. Before we start, please take a note of the forward-looking statements on Page 2 of the presentation and a glossary on Page 3. Now, turning to Page 4. I’m pleased to report another strong quarter for the Partnership with total revenues of $37.3 million and net income of $19.9 million. The operating performance in the quarter was positively impacted by a recovery of reimbursable expenses from prior periods relating to PGN FSRU Lampung, partly offset by certain vessel upgrade costs relating to Cape Ann. At the end of the quarter, the Partnership announced that Höegh LNG and EGAS had agreed to amend the time charter for Höegh Gallant in Egypt, where the unit will be employed as an LNG carrier through April 2020. The amendment contract structure is a result of Egypt successfully bringing new gas discoveries into production and thereby reducing its need for importing LNG. As the owner of Höegh Gallant, the contribution to the Partnership under lease and maintenance agreement with Höegh LNG is not expected to be materially affected by the amended contract structure. I’m also pleased to announce that the Partnership has secured commitments to refinance Höegh Gallant and Höegh Grace. The new seven-year facility is for an amount up to $385 million and includes the tranche of $65 million that can be used for general Partnership purposes. Turning to Page 5 and we pick numbers through the quarter. The Partnership reported operating income of $28.7 million and net income of $19.9 million for the quarter, which is up from $15.3 million and $5.4 million in the same quarter last year respectively. The improvement is driven by the impact from the indemnified boil-off claims recorded in third quarter of 2017 and the already mentioned improvement in operating performance in the quarter. Adjusting for payments to prefer unitholders a minority interest, limited partners' interest in net income was $16.6 million in the quarter, which is up from $2.5 million in the third quarter last year. The development is mainly explained by the impact from the acquisition of the remaining 49% ownership in Höegh Grace and the issue of preferred units in the fourth quarter of 2017. Segment EBITDA of $36.4 million in the quarter includes the Partnership's proportionate share of EBITDA from assets in which its own less than 100%. This is up from $19.4 million year-on-year, mainly due to the increased ownership in Höegh Grace and the impact from the accrual recorded last year. The Partnership's distributed $0.44 for common unit during the quarter and had distributable cash flow was $17.4 million equivalent to distribution coverage ratio of 1.60. Now turning to Page 6. This is our dashboard and here you can see the Partnership's consistency on key measures, which stands out and is driven by our long-term charter agreement. With the distribution coverage ratio of 1.16 for the quarter, the ratio has been exceeding 1.16 for consecutive quarters and improving overtime, driven by stable cash flows from operation and lower debt levels. The prudent ratio level highlights the quality of our distributions and provides capacity for increased leverage as growth opportunities arrive. On this note, the Partnership has through the refinancing of Höegh Gallant and Höegh Grace, and the modest passing of the preferred and common equity markets through the ATM program, demonstrated access to incremental capital, which provides confidence around the Partnership's ability to fund future growth. Now turning to Page 7, as already mentioned, the Partnership has secured commitments for the refinancing of Höegh Gallant and Höegh Grace where part of existing credit facilities are maturing in November 2019. The facility of $385 million comprised of a senior secured term loan of $320 million, which will be used to refinance existing debt and a revolving credit tranche of $65 million that can be used for general Partnership purposes. The revolving credit facility will be used to repay amounts owed Höegh LNG, and we have reduced the Partnership reliance on funding from its sponsors. The facility has tenure of seven years, which means that the debt will mature first in 2026. The financing is subject to fine documentation and is expected to be closed in January 2019. Turning to Page 8, we present the Partnership's current platform of five modern high-quality assets. Neptune and Cape Ann are serving Total assets acquisition of Engie's LNG asset. Neptune is in Turkey and Cape Ann is ready for India having recently completed a dry docking. Under the Cape Ann contract, most dry docking costs are for the customers' account. Although, there were some smaller upgrades during the recent dry docking that were not reimbursable, hence the weaker contribution from our joint ventures segment in the quarter. PGN FSRU Lampung continues to serve PGN in Indonesia and moving westwards to Egypt's. Höegh Gallant recently departed and is now operating in LNG carrier mode. The Partnership's direct counterparty for Höegh Gallant continues to be Höegh LNG and unless more attractive employment alternatives emerge, the Partnership's intent to exercise the option to charter the FSU back to Höegh LNG and 90% of the current rates up and expire of the existing contract. Last but not least, Höegh Grace continues to serve spec in Colombia and has role of providing energy security in the market with gas-fired power plants serve as a complement to hydro-generated powers. Turning to Page 9, this slide provides additional color on existing contract and updates the picture at the sponsor level. And as you can see from the overview, Höegh LNG energy has been successful putting its new build FSRUs to work on medium-term contract, employing them both in FSRU and LNG carrier mode with Naturgy and CNOOC as counterparties. Höegh Esperanza arrived in Tianjin in China this month and has been sending out commissioning volumes of gas in advance of the winter season, but also providing LNG for reloading to trucks. Operating FSRUs in this manner increases throughputs and can make the economics particularly compelling in large markets such as China. Now turning to Page 10. Here you see the high number of market opportunities backed by diverse drivers of demand. Driven by replacement of coal and oil in power and industry production, China is believed to pick up a large share of increasing LNG supply, although, volumes are expected to go as well. Höegh LNG consider itself to be well positioned for potential FSRU projects in China, as well as in Australia and it’s pursuing opportunity also in South East Asia, Middle East, Africa and Latin America. While the FSRU market remains competitive, it’s worth mentioning that’s the value of our FSRUs has enhanced by the strong recovery in the LNG carrier markets where our customers could put the units into alternative use in periods of lower decent regasification demand. Opportunities are also expected in small scale LNG applications, which could impact the throughputs of our existing assets, serving as hubs for local distribution, bunkering and other small scale LNG activity. Our sponsor Höegh LNG has recently made an investment into Avenir LNG, which is the newly established provider of small scale energy services. And overtime, this activity is expected to stimulate further demand for FSRU capacity. Now turning to Page 11. This sets out the income statement of the quarter from our 6-K in more detail. I have commented on many of the lines I can see in my opening remarks and here you can see that revenues have increased year-on-year due to the recovery of reimbursable expenses. And that equity and earnings of joint ventures also is up year-on-year, mainly due to the impact from the accrual recorded last year. I'd further like to highlight the reduction in interest expenses, which is primarily related to amortization of debt. And elsewhere, there’s good stability as you would expect of our contracted business. Preferred unitholders' interest in net income is as a result of the preferred units offering that was made into fourth quarter last year and the subsequent issue of preferred units under the ATM program. And the absence of non-controlling interest in net income in the quarter is due to the acquisition of the remaining 49% ownership share in Höegh Gallant in the fourth quarter of 2017. Now turning to Page12. The balance sheets is little changed, one of the larger development is $19 million change in accumulated losses of joint ventures included other long-term liabilities, which is driven by the development in the mark-to-market of derivatives. The reduction in revolving credit facility due to owners and affiliates from $62 million to $39 million is also notable and this will be reduced to zero and the closing of the refinancing of Höegh Grace and Höegh Gallant. Page 13 summarizes the numbers making up to distributable cash flow for the quarter. And then from this, I would like to highlights the $1 million that will be refunded back to Höegh LNG in the fourth quarter relating to previously paid indemnity in relation to the expenses from prior periods that ultimately was reimbursed by the charter and record as income in this quarter. Finally, turning to page 14, it summarizes the investment proposition in Höegh LNG Partners. And I would just like to highlight the Partnership is the leading provider of floating LNG input terminal services, operating a feet of modern FSRUs, generating stable and predictable cash flows in an industry of its strong fundamentals. And with that, I would like to conclude the presentation and open up to questions from participants.

[Operator:]

[Operator Instructions] Our first question comes from Melvin Shieh from Bank of America Merrill Lynch. Please go ahead.

[Melvin Shieh:]

Just wanted to see if I could get some details to help frame the timing of potential dropdowns, the appetite for longer deals from current charters for the Esperanza and Gaint, and any interest in the currently on contracted new build?

[Steffen Føreid:]

So the new builds are currently contracted on medium term contract, and are being offered for long-term FSRU employments. The interim employment then goes through 2021, which fits well with then the scheduled or anticipated start up of long-term FSRU opportunities that we are pursuing. So I think the dropdown prospects to the MLP would be linked with the estimated startup of the long-term FSRU contracts that we are pursuing with start up in the 2020 onwards.

[Melvin Shieh:]

And how about just on the Avenir comment. Just talk a little bit about how the current fleet might fit in to the business and strategy of that investment?

[Steffen Føreid:]

So Avenir is a provider then of small scale LNG services, and that could be both small scale local distribution, it could be small scale import terminals, and it could also be bunkering. And what we foresee is that the network we have of FSRUs could be used as gas station as hubs for local distribution where you then have a small scale LNG carriers offloading from FSRUs and then distributing to other demand points. And we believe that over time, this small scale activity will increase or could increase the throughput through existing fleets of Höegh LNG Partners and also contribute to increased demand for FSRUs over time. So we see this as a interest market in itself where they could likely will be not going to affect for the future FSRU demand.

[Melvin Shieh:]

And are the current five vessels all operating at full capacity, or is still unusually gas capacity?

[Steffen Føreid:]

In Avenir?

[Melvin Shieh:]

No, for the current fleet, the five vessels in the current fleet for HMLP?

[Steffen Føreid:]

For HMLP, all units on the water are on contract at the moment. And when the next delivery comes, now later in December, Höegh Gallant it's called that will also go straight into an employment as LNG carrier. So, all units at the parent level are on employment.

[Operator:]

Our next question comes from Chris Wetherbee of Citi. Please go ahead.

[Unidentified Analyst:]

Good morning. James on for Chris. I had a couple of questions about refinancing. I wanted to get a sense of what magnitude of interest savings you might get initially? And then a couple of follow-ups.

[Steffen Føreid:]

I didn’t pick up the question. Could you repeat that please?

[Unidentified Analyst:]

What level of interest savings you're likely to see through this refinancing if for -- if any from the bank deal? Thank you.

[Steffen Føreid:]

Bad line, are you asking interest level?

[Unidentified Analyst:]

Correct.

[Steffen Føreid:]

So if you compare this to the existing financing, the margin is down. We do intend to swap it, the swap rate is up. So all-in-all, you might see it marginally increase in the fixed interest rate compared to what you’re seeing today. On the revolving credit facility and there will be lower interest charge compared to what the Partnership is staying to the parent today. So if you then assume full drawing under the revolver and taking into account the increased leverage compared to the day, the total interest expense will only be marginally higher.

[Unidentified Analyst:]

So you are expecting to utilize the full revolver based on your comment there?

[Steffen Føreid:]

Well, not as the outsets. What we intend to do is to draw an amount and we pay what’s outstanding under the rule to the parent that’s some $35 million something. So we expect it to be drawn to that amount initially. And overtime, we expect to use that revolver instead of throwing under the revolving provided by the parent. So overtime, it will then be an increasing draw under the revolver.

[Unidentified Analyst:]

And you've used -- your shares units is due paid on debt historically to the parent. Will this change that strategy overtime or will we still see the same cadence in the pattern?

[Steffen Føreid:]

Yes, we have tested the common and prepared unit markets marginally or through ATM program. And we will continue that if market conditions allow to address certain extent. And then we will use that proceeds to reduce the drawing under the revolver.

[Unidentified Analyst:]

And also wanted to get clarification on previous comments. So when you talked about dropdowns, you talked about 2020. Is that you see the most -- the next most likely dropdown in your opinion or do you think 2019, there could be something in 2019?

[Steffen Føreid:]

I think the base case is that -- so you will dropdown in connection with commercial startup. It could potentially do it before commercial startup if you do it in combination with an interim employment assuming they're all a lift that’s relating to the long-term employment. So I think, yes, it could potentially be earlier than 2020 but that’s when -- it's around 2020 where there is a scheduled startup over the long-term employment we're looking at. It could be -- you could see also earlier dropdowns depending on how the market is developing.

[Unidentified Analyst:]

Would a longer-term contract being struck in early 2019 for the Esperanza or one of the other one potentially lead to a drop down or would -- do you actually see the commercial startup in a longer term contract from that being more likely driver for a drop down?

[Steffen Føreid:]

I think the base case is that commercial startup is the trigger point for dropdown, but we will also consider it can be done in combination with an interim employment. But that’s something we then have to consider on when the opportunity arrives. So I think the base case is dropdown at commercial startup. But depending on that contract, we could also see it early in combination with an interim employment. But that it's too early to commit to anything on that.

[Operator:]

Our next question comes from Max Yaris from Morgan Stanley. Please go ahead.

[Max Yaris:]

I would like to ask a couple of questions about the Slide 10, the existing and potential FSRU contract. Any other color you could provide on how many tenders you think could be decided soon. Where are these projects and how the returns compare now versus maybe the past couple of years? Thank you.

[Steffen Føreid:]

So we’re at Höegh LNG is involved in several tender processes. We have exclusivity on two processes and the final round of another two. But there are several ongoing processes and they are located in Asia and Africa. And so I think the area where we see most activity at the moment is in Southeast Asia, Australia and China. That's where the most activity is ongoing at the moment. When it comes to the return and I think we have seen increased competition in the FSRU space over some time and we have seen the rates coming down. But at the same time new building prices has decreased so the returns are still healthy. We expect that we are at, let's call it, a low point in the FSRU cycle in terms of rates and that we maybe will be able to see improving rates going forward.

[Max Yaris:]

And then we talked a bit about Avenir. But are there any potential dropdowns to HMLP directly? And how would that be shared with Golar MLP, for example?

[Steffen Føreid:]

No, I don’t think there will be -- there will not be any dropdown possibilities from Avenir as we see it. But this strategic rationale for doing this from a FSRU perspective is that we believe the small scale activity will drive demand for FSRU services, and could lead to a widening of the FSRU market. And that would be the dropdown, a result of the Avenir investment, but no dropdowns from Avenir itself. I don’t foresee that that’s a possibility to the Partnership.

[Operator:]

[Operator Instructions] Our next question comes from Liam Burke of B. Riley FBR. Please go ahead.

[Liam Burke:]

You mentioned in your prepared statements that you do have flexibility of shifting some FSRU to LNG carrier. If the FSRU projects softens and you do have to shift assets away from there to the carrier market. Do you see any significant risk to the cash flows?

[Steffen Føreid:]

Are you talking at Partnership levels?

[Liam Burke:]

Yes.

[Steffen Føreid:]

No. I mean, we have -- if our clients should wish to use the FSRU in carrier mode instead of FSRU mode, we would still have the same time charter income. So from our perspective, we have -- the Partnership has charter agreement with the clients and will earn a day rate whether it’s used in FSRU or carrier mode. So my comment on that was more that the strengthening of the carrier market is something that has the positive knock on effect also on the valuation of FSRU business as such. But it would not lead to any changes in the cash flow from the Partnership associates.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to you Steffen Føreid for any closing remarks.

[Steffen Føreid:]

Thank you. So then I would just like to thank everyone for dialing in and for asking questions, and for attending this earning call. Many thanks.

[Operator:]

The conferences is now included. Thank you for attending today’s presentation. You may now disconnect.