Höegh LNG Partners LP
Q4 2018 Earnings Call Transcript

Published: 27 Feb 2019

[Operator:]

Good morning and welcome to the Höegh LNG Partners 4Q 2018 Earnings 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. And now I would like to turn the conference over to Steffen Føreid. Please go ahead sir.

[Steffen Føreid:]

Thank you, Keith. Good morning, ladies and gentlemen. And welcome to Höegh LNG Partners Fourth Quarter 2018 Earnings Call. For your convenience, these webcasts and presentation are available on our website. Before we start, please take a note of the forward-looking statements on Page 2 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 $37.8 million, limited partners' interest in net income of $12.8 million and segment’s EBITDA of $37.5 million. Based on the strong operating performance and financial position, the Partnership distributed $0.44 per common unit during the quarter, which is equivalent to a distribution coverage ratio of 1.25 times and a distribution of $1.76 per unit on an annual basis. I am further pleased to report that the refinancing of Höegh Gallant and Höegh Grace announced last quarter has been closed in a subsequent event in January 2019. Into Page 5, we are putting numbers through the quarter. The Partnership reported total revenues of $37.7 million in the quarter, which is up from $37.5 million in the fourth quarter last year. The increase is due to other revenue relating to insurance proceeds in the quarter and higher time charter income on Höegh Gallant, offset by lower time charter income on PGN FSRU Lampung in the quarter compared to the fourth quarter last year. Due to technical issues, there was a performance claim for Höegh Gallant for in the quarter. However, this compares to 7 days off-hire for planned maintenance in the fourth quarter last year resulting in higher income for the units in the quarter. Operating income was $22.2 million in the quarter. However, adjusting for unrealized gains and losses of derivative instruments and joint ventures, operating income would have been $26.4 million in the quarter, which is up from $26 million in the fourth quarter last year. The improvement is due to higher revenues and lower administrative expenses, partly offset by higher vessel operating expenses in the quarter compared to the fourth quarter last year. Limited partners’ interest in net profit adjusted for all unrealized gains and losses of derivative instruments was $13.8 million in the quarter. This is down from the fourth quarter last year mainly due to an income tax expense in the quarter, compared with an income tax benefit in the fourth quarter last year. The segment’s EBITDA was $37.4 million in the quarter. This is up $3.7 million from the fourth quarter last year, mainly due to the acquisition of the remaining 49% of Höegh Grace with effect from December 2017. Turning to Page 6, we are showing the development and key metrics over time where the positive trends and consistency stands out. Segment EBITDA has been improving over time driven by acquisitions and improved operating performance. Limited partners’ interest in adjusted net profits, which excludes unrealized gains and losses on derivative instruments has also been positive trending with the fourth quarter 2017 result standing out due to the tax benefits in that quarter. With the distribution coverage ratio reaching 1.25 times for the quarter, the ratio has been exceeding 1.15 for five consecutive quarters and improving over time driven by stable cash flow from operations and reduced debt levels. Turning to Page 6 – sorry, turning to Page 7, we are showing the income statement in more detail. For the quarter-on-quarter comparison, I would like to highlight the development in vessel operating expenses, which are up partly due to repair costs for Höegh Gallant in the quarter. I would also like to highlight the reduction in administrative expenses which is explained by activities relating to the acquisition of the remaining 49% interest in Höegh Grace and offering of preferred units in the fourth quarter last year. The development in earnings of joint ventures is explained by the development in unrealized gains and losses of financial instruments while the development in income taxes is due to the tax benefits reported in the fourth quarter last year as already mentioned. Finally, I would like to highlight the reduction in financial expenses, which is driven by a positive development in unrealized gains on financial instruments and lower outstanding debt demands. For the full year, we would like to highlight that limited partners’ interest in net income was $65.3 million equivalent to an earnings per unit held by the public of $1.93, which compares to distribution per common unit of $1.76. Turning to Page 8, the balance sheet has not changed much since year-end 2017. One of the largest developments is the reduction in long-term debt of $44 million during the year, which is explained by regular amortization. Another development is the reduction in revolving credit facility due to owners and affiliates of $12 million repaid mainly with proceeds from the issue of units under the ATM program. During the quarter, approximately, $4 million of proceeds were raised under the program. However, no units have been issued since the beginning of November 2018. Into Page 9 and as already mentioned, the Partnership secured commitments for a refinancing of Höegh Gallant and Höegh Grace during the third quarter, a transaction that was closed in January 2019. A new facility is for an amount up to $383 million and comprised $320 million in secured – senior secured term loans, which are fully drawn and a revolving credit tranche of up to $63 million, which is undrawn and maybe used for general Partnership purposes. The facility has a tenor of 7 years and a swapped interest rate of approximately 5%. This facility, the Partnership has refinanced at improved terms enabled a further diversification of banking – of banks in the Group and reduced its reliance on funding from the sponsor. Turning to Page 10. We present the Partnership’s current platform of five modern high-quality assets. Overall long-term charters is an average remaining contract length of more than 10 years. Neptune continues to operate in FSRU mode in Turkey and is expected to remain at site until mid this year. Cape Ann is operating in LNG carrier mode in worldwide trade and we continue to do so until the likely commencement of operation in FSRU mode in India this summer. PGN FSRU Lampung is in location offshore Lampung in Indonesia and that’s in increased regasification activities in the past few months. Höegh Grace continues to operate as an FSRU in Cartagena, Colombia providing energy to gas-fired back-up power plant. Finally, Höegh Gallant is operating in LNG carrier mode since the departure from Egypt last year with the Partnership continuing to have a contractual relationship with the sponsor relating to the units. Turning to Page 11, this slide updates the picture at the sponsor level. And as you can see from the overview, the sponsor has been successful at fitting its newbuild FSRUs to work on medium-term contract. Höegh Giant is operating under a three year LNG carrier contract with Naturgy. Höegh Esperanza is operating under a three year combined FSRU and LNG carrier mode with China and Höegh Gannet is operating under a 15 months LNG carrier contract with Naturgy. In addition, the sponsor has been selected as the FSRU provider for AGL’s proposed LNG import project in Crib Point in Australia for a project that is estimated to generate an annual EBITDA of around $30 million. The sponsor has further achieved exclusivity and is in the final run of additional projects all with the scheduled start-up in 2020, 2021. Turning to Page 12. We are showing the development in global LNG supply and demand historically and projected as prepared by IHS Markit. From this you will see that global LNG production is expected to increase from approximately 320 million tons in 2018 to approximately 550 million tons in 2030. Of this increase, approximately 100 million tons are estimated to come from capacity under construction and this includes projects such as Prelude, Corpus Christi, Cameron and Freeport. The rest is expected to come from proposed new capacity. And in this respect, the impact on final investment decisions for new LNG production facility seems to have ended. In 2018, LNG Canada’s project was sanctioned. Qatar Petroleum and Exxon Mobil have further advanced their goals in past LNG projects in the U.S. Gulf Coast. And in addition, Qatar Petroleum seems to be moving ahead with its announced expansion of existing facility. Worth noticing is that recent final investment decisions are backed by shareholders with volumes to be sold to off-takers at the later stage. Turning to Page 13, we are highlighting some statistics showing that 2018 seems to be a turning year for the LNG and the FSRU markets. Global trade in LNG increased almost 10% to 328 million tons in 2018. 19 million tons of new production capacity was sanctioned including LNG Canada’s 14 million tons already mentioned. Within the LNG Carrier segment, the average dayrate almost doubled to $85,000 per day and in the FSRU segment, six new contract awards were made, of which two went to the sponsor. Now turning to Page 14, drivers of FSRU demand is typically replacement of coal and oil and power and industrial production, diversification of energy supply sources and seasonal demand. While the Middle East, Pakistan and Latin America are the regions importing most LNG through FSRUs today, new FSRU project opportunities are spread across the world. South Asia, Asia and Oceania represents the most prospects, followed by South America, Europe and the Middle East, North Africa. While the FSRU market remains competitive, it’s worth mentioning that the recovery of the LNG market has led traditional ship owners to focus more on this segment and less on the FSRU segments, which is to the benefit of our sponsor when bidding for new business. So turning to Page 15, I would then like to turn to this page just for a summary of MLP investment propositions, which concludes the presentation for today. And with that, I would like to open up to questions from participants.

[Operator:]

[Operator Instructions] And the first question comes from Chris Wetherbee with Citigroup.

[ChrisWetherbee:]

Hey, thanks for taking my call this morning. I appreciate it. Wanted to start with a question about the Gallant and just wanted to get a sense operationally what happened in the fourth quarter and from a cost perspective, do you expect any of that cost that impact the fourth quarter to linger into the first half of 2019?

[Steffen Føreid:]

Hi, Chris. There was an issue with the electrical equipment on board which meant that we had to deviate from the planned routes and had some additional costs and those costs are covered in the fourth quarter and we don’t expect any additional cost to come in 2019 relating to that matter.

[ChrisWetherbee:]

Okay. That’s helpful. Appreciate it. Wanted to also ask about the potential for the AGL contract and how do you think about the asset to deploy on to that business? Is it the whole number 10 or do we have one of the other FSRUs that’s currently in trading mode that might be able to be shifted there. How do you think about the assets deployed for that potential business?

[Steffen Føreid:]

So, the decision for which asset to use there is still to be decided upon, but it will be one of the existing assets. And we hope that a final investment decision – this contract is still subject to CPs and we hope them to be lifted during the year with the start-up then of the projects in 2021. So, the parent will – the sponsor will use one of the existing units for that project, but it remains to be decided which ones.

[ChrisWetherbee:]

Okay, okay. That’s helpful. And then, I guess, just maybe more broadly taking a step back and thinking about the fleet in general, as you look at supply demand if FSRUs build over the course of the next couple of years, do you have sort of the target date when you’d like to have the assets that are currently trading as carriers transition back into sort of full FSRU deployment. I just want to get a sense of maybe how you think about this a couple of years out if you still think you will need to have vessels trading as opposed to actually operating in sort of true FSRU employment.

[Steffen Føreid:]

Yes, so, that’s – again, that question goes in relation to the sponsor. And if you look at the fleet of the sponsor, you have Giant, Esperanza, Gannet and FSRU#10 which then are potential dropdown candidates. And Giant, Esperanza, Gannet, they are on medium-term contracts expiring in 2020, 2021. And that means that they go off their current interim contracts in a timely manner to be able to start-off on the FSRU projects that we currently are bidding on, because the FSRU projects that we currently are bidding on, they have a startup in mid-2020, 2021 period, which is when the units of the sponsor go off their interim contracts. And the plan is then for them to go from the interim medium-term contracts and on to long-term FSRU contracts. And then we dropdown to - offered for dropdown to the MLPs.

[ChrisWetherbee:]

Okay, okay. That’s helpful in terms of the timing there. Last question just on distribution and coverage ratio for 2019. Can you give us sense of the coverage ratio has been rising here. What do you think the appropriate one is and how do you think about in the context of distribution increases?

[Steffen Føreid:]

I think, what we normally have done is, is to consider distribution increases in connection with dropdowns and I don’t think we should deviate from that. That’s the next point in time when we will consider changing distributions. We hit – we reached 1.25 times this quarter, that’s a high number. It might not be the same level next quarter, but if you see the history, we have been above 1.15 now for five consecutive quarters and that’s what where you normally would expect to see us going forward.

[ChrisWetherbee:]

Okay, okay. So, we’ll wait for the dropdown. All right. Thank you very much for the time. I appreciate it. Thank you.

[Operator:]

Thank you. And the next question comes from Donald McLee with Berenberg.

[Donald McLee:]

Good morning. Just to start things off, could you talk a bit about the boil off claim with the JV. Is that an event that ‘s isolated to 2018 results? Or could there potentially be a cash payment that comes due in 2019 to sell the plant?

[Steffen Føreid:]

So the boil off claim, it’s the joint venture comes only if that’s – it’s subject to that. But the joint venture companies and the Partnership they have been indemnified by the sponsor. So, the risk area is set at the sponsor level not the MLP level. We have made a provision there and if that should come to a payout under the boil off claim, the Partnership is indemnified from its sponsor relating to that.

[Donald McLee:]

Okay. Thanks for clearing that up. And then, just following up on Chris’ question on the distribution. We do have some debt maturities coming due in 2020 even though you’ve kind of ticked up your distribution coverage to that 1.2 times level. You also have some drydocking that’s probably going to impact that coverage in 2019. So, if you look to 2020, that’s kind of the earliest plan where a distribution hike could have and how should we – how you guys think about prioritizing distribution growth in 2020 versus the – getting that the upcoming maturity refinanced?

[Steffen Føreid:]

I think, if you look at the debt we have, that’s amortizing nowadays, so, and it’s amortizing relatively in pace of between 12 and 18 years normally. When we refinanced Gallant and Grace, we were able to deleverage because we had reached down to a relatively low loan to value on the existing debt. So, I think, we will – when we come to refinancing, we hope to be able to maintain the regular distribution and believe we will and we will always pursue a prudent distribution policy.

[Donald McLee:]

Okay. And then, just one more in terms of maybe growth priorities. How do you think about facilitating an additional dropdown from the parent level versus acquiring some of the unowned interest in the assets that are actually in your fleet?

[Steffen Føreid:]

So, I think, when it comes to – making acquirers from the parent is, we expect to be done in connection with the sponsors securing long-term contracts and going on contracts on long-term FSRU contract. When it comes to acquiring increasing the ownership in the existing assets, I think that’s something we have considered. But I think we have to solve the boil off issue before we can reconsider that again. So that was put on hold in connection with the boil off and will be on hold until that has been resolved.

[Donald McLee:]

Okay. I appreciate you taking the questions. That’s it on my end.

[Steffen Føreid:]

Thank you.

[Operator:]

Thank you. And the next question comes from Max Yaris with Morgan Stanley.

[Max Yaris:]

Hi guys. Thank you. I just like to follow-up on the AGL project. Is there any kind of view on what duration maybe pricing would be? And then, what is the potential for that whatever FSRU you selected for that to be dropdown?

[Steffen Føreid:]

The AGL?

[Max Yaris:]

Yes, yes.

[Steffen Føreid:]

Yes. So, the AGL is – we expect that there will be the CPs will be lifted during the year. And with the start-up in 2020, 2021, the contract is expected to generate around US$30 million in EBITDA. And it’s a long-term contract that will fit well into the Partnership’s portfolio. So, I think, once CPs have been lifted, and we are closer to commercial start up, that’s when there will be a dialogue between the sponsor and the Partnership for the dropdown of that. But I do expect that to be maybe the next dropdown candidate, but it’s certainly a relevant one.

[Max Yaris:]

Okay. And then I believe, you guys are looking at another Australia project. Do you have any updates on that or how close is the FID?

[Steffen Føreid:]

That’s right. So we have also been – the sponsor has been selected for its supplier for another the AIE project in Australia. So, that project is also subject to CPs. They are pursuing environmental permits and they are also pursuing commercial off take agreements. So that’s a project that is progressing in parallel with the AGL. But it’s too early to say anything about the likely outcome of that process and when potentially there could be a final award for that project. But it is one of the two more realistic or relevant project in Australia from our point of view.

[Max Yaris:]

Okay. And then I am just wondering if you could give a little bit of color as to current market rates. Obviously, we see LNG carrier rates come down in the past couple months. But how does that affected maybe near-term FSRU rate and then longer-term charter rate?

[Steffen Føreid:]

I think, yes, in the carrier markets, the rates have come down recently but still compared to last year, they are up on average. So 2018 compared to 2019 - 2017. And I think the positive development in the carrier market is – has led traditional ship owners to focus more on that segment and less on the FSRU segment. So, I think the big – the biggest benefit from the sponsors’ perspective and also from the Partnership’s perspective relating to the improvement in the carrier market is that it will – it has led to less competition and I think that’s a positive note on the FSRU rate going forward as such.

[Max Yaris:]

All right. Thank you so much.

[Operator:]

Thank you. [Operator Instructions] And the next question comes from Gregory Lewis with BTIG.

[Gregory Lewis:]

Yes. Thank you and good afternoon. As we look at developments in the FSRU market, it clearly looks like there is some potential opportunities out there over the next couple years. Just, as we think about that, like, how should we be thinking about these – this pick up in potential FSRU demand in 2021. Is that really just these customers need this – need to set these units in place or has the market as a whole had to adjust their pricing to entice some of these potential projects?

[Steffen Føreid:]

Well, I think, we have seen a drop in FSRU rates compared to some years back, yes, we have, compared to the first – the FSRU contracts we were awarded four, five, six years ago. And so, I think, and that’s – that probably have led to the projects we are looking at now has been a catalyst them to get moving and developing their projects further. So they are benefiting from a rate reduction we have seen over few years now. But I think we believe we have reached the bottom of the curve and that we hope to see a positive development in FSRU rates going forward. I think the fact that there is more activity on the FSRU segment now is more driven by the fact that they need to move forward now in order to be ready for the supply - to take on board the supply of LNG when it’s coming in 2021. And so I think that’s the main reason for the increased activity is that, they see that LNG is coming and they need to move forward with the projects in order to be able to meet that time when the LNG is coming.

[Gregory Lewis:]

Okay. So it almost sounds like the fourth or fifth FSRU contract will most likely have a better return than the first one signed. Is that fair?

[Steffen Føreid:]

Well, I hope to – we do hope to – we think that we have reached the bottom. Yes, and that you should expect to see positive developments hopefully in FSRU rates going forward compared to what it is today.

[Gregory Lewis:]

Okay. Thank you guys very much for the time. Have a great day.

[Steffen Føreid:]

Thank you.

[Operator:]

Thank you. And as there are no more questions at the present time, I would like to return the floor to Mr. Føreid for any closing comments.

[Steffen Føreid:]

Well, I would just like to thank everyone for dialing in today to Höegh LNG Partners’ Fourth Quarter Earnings Call and if there are any follow-up questions, welcome everyone to contact us directly. Thank you.

[Operator:]

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