Höegh LNG Partners LP
Q4 2017 Earnings Call Transcript

Published: 28 Feb 2018

[Operator:]

Good day and welcome to the Hoegh LNG Partners Fourth Quarter 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, CEO and CFO. Please go ahead, sir.

[Richard Tyrrell:]

Thank you, Rachel, and good morning, ladies and gentlemen. Welcome to the Hoegh LNG Partners fourth quarter 2017 results call. The presentation is available on the website if you haven't already got it. And there are a couple of pages with forward-looking statements and a glossary on 2 and 3, that I'd like to draw your attention to before turning to Page 4, where the presentation really begins with the Hoegh LNG Partners fourth quarter highlights. During the quarter, our high-quality modern assets generated stable cash-flows in accordance with the long-term contracts. It was a quarter in which HMLP achieved its highest ever results for distributable cash flow, a level that equates to 1.17 times in coverage. Activity levels were high with $115 million perpetual preferred equity offering in October and the drop-down of the remaining 49% interest in the Höegh Grace closing on December 1. The offsets between the timing of raising capital and the drop-down created a bit of a drag, but this is more than overcome by a strong operational performance and a tax effect that offset those, but have weighed on net income in the past few quarters. After the end of the quarter, HMLP declared and paid its $0.43 per unit distribution with respect to the quarter. We also paid $0.79 per unit distribution to our new Series A preferred unitholders. This first payment included interest up to the February 14 of this year. Future payments will only be for one quarter rather than quarter-and-a-half, bringing down the amount going forward. Finally, in January, HMLP filed an ATM program. The program increases balance sheet flexibility and further expands our options for funding future growth. An innovative feature is the ability to issue either common or preferred based on conditions in either market being supportive. Turning to Page 5, here we put some numbers to the quarter. The time charter revenue for the fourth quarter 2017 was $37.6 million compared to $23.3 million in the third quarter of 2016. The growth is primarily related to the Grace, which was acquired at the start of 2017 and which has been consolidated since this time. Reported operating income dropped for the quarter to $29.7 million from $33.2 million this time last year. Last year's operating income included a sizeable contribution from the JVs where there was a large mark-to-market impact from the swaps. Adjusting for this, operating income increased for the quarter to $26 million from $17.1 million at the same time last year as would be expected given the addition of the Grace. As a result of the preferred equity raise in October, net income this quarter is reported gross and net to limited partners. The gross amount for the third quarter 2017 was $25.4 million, the limited partners' interest in net income was $20.9 million, which adjusts the $16.4 million excluded unrealized gains on derivative instruments and small unrealized FX effects. This compares to $8.1 million for the fourth quarter of 2016. Segment EBITDA for the quarter, includes one month of the remaining 49% of Grace, since it was closed in December, and it came to $33.7 million compared to $25.8 million in the same quarter last year. And as a reminder, at the bottom of the table, there are number of cash flow elements that relates to accounting treatments that are excluded from EBITDA, most notably related to the finance lease accounting for PGN contract and the purchase price allocation on drop-downs. Moving to Page 6, here we tracked how the numbers are progressing at the time. The trends are positive across the Page. The Segment EBITDA has more than doubled since IPO. Net income and to a lesser extent Segment EBITDA popped up this quarter as a result of the tax effect that has weighed on past quarters unwinding. This effect primarily relates to Indonesia and the interaction between tax payable and its reimbursement under the contract. The effect on Segment EBITDA is related to such reimbursable taxes and the completion of past year orders on the amount that the charter is to reimburse. The net effect was reduced somewhat by the Gallant, which as previously flagged was down for seven days maintenance and was of higher as a result. To put net effect into context, excluding these revenues for the Höegh Grace and comparing last year's quarter with this quarter, time charter revenues increased by $1 million due to the tax effects, after offsetting the lower revenues due to the off-hire on Gallant. For those following HLNG, the effect was much lower at the HMLP level, because of indemnities that were recorded back in 2014, when the uncertainties originally arose. Distributable cash flow to common unitholders reached almost $17 million for the quarter, the highest ever, which equates to a coverage of 1.17 times. It reflects the strong underlying performance of our assets, our long-term contracts and to be assistance of the tax effect. Our distribution was more than supported by distributable cash flow for the quarter. The next quarter, we'll see a full contribution from the remaining 49% of the Grace, if you take just one month of the three systime [ph] and we will review the distribution level, but if you do an increase in advance of the first quarter 2017 distribution announcement scheduled for late April. Page 7, as a reminder of the deal parameters of the acquisition of the remaining 49% of the Höegh Grace, I've mentioned [Technical Difficulty] on December 1. Since it has been consolidated from the start of 2017, its contribution to EBITDA can be clearly seen as $44 million for the year. And at such level, it is substantially additive to EBITDA and, of course importantly, nicely accretive to distributable cash flow. The important point that I wish to make on this slide is the drop-downs make a very meaningful difference of HMLP, when they do come along. Even if this is no way as frequent as I would like. As shown on Page 8, HMLP's portfolio is becoming increasingly diversified as a result of the transaction with the addition of another modern state-of-the-art asset. All of the assets are currently working in FSRU mode, the Neptune in Turkey, the Cape Ann in China, the Lampung in Indonesia, and the Gallant in Egypt. The assets are performing according to contract. And although something that affects our fixed day rates, there have been notable increases in throughput in China and Colombia. Page 8 lists the contract parameters in more detail. The existing assets have more than 11 years of contract remaining on average. And HMLP has full contract coverage through the first quarter of 2025, both of which are the sector leading. FSRU opportunities at the HLNG level need to crystallize to become drop-down candidates for HMLP, but here I believe there are grounds for optimism. Page 10, summarizes how HLNG sees the FSRU market and its business development activity. The frequency of opportunities evaluated has increased and HLNG is currently involved in several advanced tendering processes. This activity correlates with the pickup of new LNG contract awards and a general increase in activity across the sector after a period of slowness. If you read BP's recently published Energy Outlook, it makes compelling case for gas and LNG at least the most of the fossil fuels with a big increase in primary energy demand coming from power generation like gas is particularly competitive. Page 11, shows how FSRU volumes rose more moderately in 2017, after a sharp upturn in 2015 and 2016. Interestingly, you see China's appetite for LNG reflected in the volumes flowing through the Cape Ann, which of course is one of HMLP's assets. There are a number of projects that are moving forward, for which HLNG newbuilds are highly competitive. And I'm moving forward to news flow from these adding to clarity around the drop-downs. Page 12 gets back to the numbers for the quarter. It presents the quarter-on-quarter and year-on-year comparison of P&L. If you adjust for the effect of the swaps, there is strong growth to be seen across all line items. The move in tax to benefits for the quarter reflects greater clarity around the position in Indonesia, where an appropriately conservative position was previously taken in relation to the deductibility of interest. Going forward, the non-controlling interest that you see here will fall away following HMLP's acquisition of the remaining 49% of Grace, which closed in December. On Page 13 there is some extra detail on the financial income and expenses. And then Page 14 has our segment tables that provide a more detailed breakdown. That there is stability at the JV level, where you have expected given the - so that have - that includes the same assets here between quarterly comparisons. And then, at the Majority held level, you see growth that comes about from the introduction of the Grace. And the tables also highlight the non-cash gains on derivative instruments that are excluded from the adjusted numbers that were presented on the highlights page. Corporate overhead is included in the other column. As you can see, it was $1.7 million for the fourth quarter of 2017 and that includes the costs associated with the drop-down of the remaining 45% of Grace. It has been reasonably steady around this level since the IPO, despite the doubling of size of the fleet. Page 16 includes the summary balance sheet. The balance sheet has grown since last year with the preferred offering and the acquisition of the Grace. The comparison shows no minority interest since the asset - since the Grace was 100% owned by the year-end, and was get to be purchased as of year-end 2016. And you can see that the cash with some reserve purchase in the 2016 column. On Page 17, we have the last of the tables, which relates to distributable cash flow and shows how it reached almost $17 million for the quarter or coverage of 1.17 times the declared common distribution. It's the last time we'll see the non-controlling interest line items in this table as they relate to the period of HMLP only owning 51% of Höegh Grace, and of course, it owns for the 100%. The other adjustments to note include a return to HLNG of a previously paid indemnity payment for the 2014-2015 period, that relates to the tax uncertainty in Indonesia, that has now been clarified with the deferred revenue being recognized as revenue. The distribution to our new preferential preferred holders is also listed. And lastly, there is a moderately increased maintenance and replacement CapEx reserve that was lagged one month of the full Grace ownership in the quarter. This, of course, will increase to reflect the full three months ownership for the first quarter of 2018. Taken altogether, the distributable cash flow comes to $16.959 million and coverage to 1.17 times. And I think that's a good note for me to end and turn it over to questions. Rachel, would you be kind enough to open the mike?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Spiro Dounis with UBS. Please go ahead.

[Spiro Dounis:]

Hey, Richard. Good morning. How are you?

[Richard Tyrrell:]

Good. Thanks, Spiro. And you?

[Spiro Dounis:]

Good. Not too bad. I just wanted to start off on the sponsor and in some of the several advanced tenders that you mentioned. Can you give us a sense of maybe the tenure of these potential projects and also just how quickly they could become drop-down candidates? I know you've got some vessels delivering in 2018 that I don't think are fixed yet. Could you actually get those fixed up on business this year?

[Richard Tyrrell:]

Yeah, I think it's certainly possible, based on the pipeline, the business development pipeline. When it comes to tenure, I mean, I would say that the period of slowness has resulted in I think a little bit of oversupply in the FSRU space. So I suspect that that will have an influence on pricing and it will have an influence on the Group's sort of willingness to enter into longer-term contracts. So you might see some shorter term contracts, but the thought is there that, for example, we do have the Chilean project, which is down on 2020. So having a bridging contract which takes up until that time is certainly something that is attractive I think from a Group point of view and attractive for me from MLP point of view, because of course, whether it's one contract or combination of two contracts, if you have an asset which is contracted for a long period of time it becomes eligible for drop-down.

[Spiro Dounis:]

Okay. So you would make it work around that, that five year requirement is effectively what you're saying?

[Richard Tyrrell:]

Yeah, indeed.

[Spiro Dounis:]

Got it. Okay. That makes sense. And then just kind of sticking with the sponsor little bit here, I know at one point you thought about floating LNG and it seems like maybe the returns weren't there at the time, but of course, the LNG market has changed a lot, LNG prices are considerably higher compared to when you're considering those projects. And so it seems like the pendulum has kind of swung back in favor here in - maybe in favor about FLNG as opposed to FSRUs. Is that something that you think could come back on the table and also offer more growth going forward?

[Richard Tyrrell:]

I think this is something we'll always review. I wouldn't say we've got to a point where we want to sort of re-enter that business by any means. And I think there is still a lot of moving parts, because the pricing is still down. There haven't been that many long-term contracts. You're competing with some very competitive folks such as Scheneya [ph], when it comes to those new volumes. And, of course, there is a sort of financeability sort of issues well in that market with the buyers very often looking for shorter term uptakes which in also bankable. So, we always keep an eye on it, but I wouldn't say that it's got to a point yet, where as a Group we'd be jumping back in.

[Spiro Dounis:]

Got it. Thanks, Richard. I'll hop back in the queue.

[Richard Tyrrell:]

Thank you, Spiro.

[Operator:]

The next question comes from Christian Wetherbee with Citigroup. Please go ahead.

[Unidentified Analyst:]

Hello, this is William on for Christian. I just wanted to ask a little bit about your distributions, because I know you guys are talking about, you just had your best quarter ever in terms of quarterly distributable cash flow and you're also talking about your potential increase in your distribution 1Q 2018. I was just wondering if you could give us an update on your targets for distribution coverage in 2018.

[Richard Tyrrell:]

Well, sure. I mean, this increase that we'll be reviewing for the first quarter, of course, reflects the drop-down of the Grace fundamentally. So the question as you've said is what is the appropriate level of coverage to benefit [ph], which is the other parameter. And my views on this are that you have to run at a decent level of coverage. I think that's what we'll be doing, certainly slightly higher than what we maybe have done in the past. And that's we're not eliminating an increase for certainly the factor in how much it lastly ends up being.

[Unidentified Analyst:]

Great. All right, so kind of like a little bit higher than you guys have in the past, but still kind of consistent potentially with where you finished this quarter?

[Richard Tyrrell:]

Yes, yes, yeah. I mean, this quarter was I think particularly good. And it was settled a little bit by that tax effect. But next quarter, of course, we'll have the full three months contribution of the Grace as opposed to just one month. We won't have that sort of negative carry effects of having those proceeds before actually doing the job there. So, yes, I think in the mid-teens is certainly what I'd expect.

[Unidentified Analyst:]

All right, that's very helpful. Thank you. And then, also a follow-up question on your drop-down schedule. So I was just wondering, are you guys still thinking about, well, potentially like doing maybe one drop-down in 2018 or has your expected pace of those drop-downs kind of changed. I was kind of thinking about your view on drop-down timeline.

[Richard Tyrrell:]

Yeah, and I think we still have a bit of chance of doing another drop-down in 2018. And if we can achieve that, it will obviously be quite impactful, because of the big assets compared to the size of the company. So there are obviously a few options are. I would say caveat over that for it to happen a few things do have to come together. And it's not simply a matter of pulling the trigger, so that's the plan, but so it'd be just that caveat. And then going forward, I certainly view, one a year as being very doable and I think the question is more sort of whether we'll have to do more than that.

[Unidentified Analyst:]

All right. Thank you. It's very helpful. And I think Chris also is on the line. And he just had another question.

[Christian Wetherbee:]

Hey, Richard. I just jumped on. I apologize, juggling multiple calls this morning, so thanks for your patience. I guess, I want to kind of revisit your discussion we had last quarter and just get may be a sense sort of an update on your thoughts there, timing, anything there would be helpful?

[Richard Tyrrell:]

Yeah. And I think as we said last quarter, it's been flagged as something that needs to be addressed. And as we census across the Group on, the outcome will be, but I can't give you any indication on time and we just need to speak about that.

[Christian Wetherbee:]

But it certainly - but it still sounds like it's a priority for the board and for the company, the first…

[Richard Tyrrell:]

Absolutely. And it will be a long-time before we get anywhere close to the 50% type level that we do something.

[Christian Wetherbee:]

Yeah. Got it. Okay, all right. Great. Well, thanks very much for your time. I appreciate it.

[Richard Tyrrell:]

Super. Thanks, Chris. Thanks, William.

[Operator:]

[Operator Instructions] A follow-up question from Spiro Dounis with UBS. Please go ahead.

[Spiro Dounis:]

Hey, Richard, I just had one more if you entertain me. But it was open while we got you just maybe for an update on the Independence, if any, and then also, I know, you're obviously trying to do a potential partial drop-down at joint venture level. Anything you can report on that front?

[Richard Tyrrell:]

Well, I'd say both of them are still opportunities. And obviously, things are going to happen. In the case of the Independence, certainly we need to meet the consensus to do that from the charterer. And in the case of the JVs, we got to get through this boil-off matter. But I wouldn't take out of those off the table.

[Spiro Dounis:]

Got it. It's all needed. Thanks, Richard.

[Richard Tyrrell:]

Great. Thanks, Spiro.

[Operator:]

The next question comes from [Robin Henderson with MCT.] [ph] Please go ahead.

[Unidentified Analyst:]

Hi, Richard. This is Robin Henderson.

[Richard Tyrrell:]

Hi, Robin.

[Unidentified Analyst:]

Hi. Looking at the result, I see that the net debt has decreased a little bit also total leverage decrease, but with the preferred equity issuance, which you could also see as debt, because you anticipate on redeeming it. It's, yeah, overall, you had the leverage increased slightly. For future drop-downs how would you anticipate to finance these? Do you intend to, for instance, increase the leverage on some of the vessels? Do you intend to issue a Series B preferred equity or just more common shares?

[Richard Tyrrell:]

Yeah, ultimately via combination of all of the above. I mean, as you say, preferred looks like equity to debt-holders and looks like debt to the common equity holders. So we're limited to how much you can put on the balance sheet. But I do think it has a place and it's quite attractively priced, because it yields less than common equity and it doesn't grow. However, I think when it comes to future vessels, we've now got to the point where there will be a combination. And of course, the debt is amortizing in our existing assets. So this scope to refinance those with a little bit more secured debt and any excess, of course, can be then used to fund future drop-down. And I think that along with the proportional amount of pref and a proportional amount of additional common is how I would look at funding.

[Unidentified Analyst:]

Because with the anticipation of rising corporate interest rates, the additional $3.6 million I think with even more of preferred equity distribution, do you think that the current common unit distribution is sustainable?

[Richard Tyrrell:]

Yeah. Well, the current debts that we have in place, it's all fixed. So that's the reason why we see such a massive mark-to-markets on the swaps. So as rates go up, you'll continue to see those movements, but we're not actually going to be paying out any more in interest, and because we, well, in a way have been paying more and then we otherwise would have done, because of fixing it in advance of the rates coming really off. You'll find that the actual level at which we finance these assets at least on the debt side is going to be same. The pref is what it is, and this one is fixed. So I see your point, but I don't see that we're going to find that a rising rates environment is going to create a squeeze on equity distributions.

[Unidentified Analyst:]

Sure, but you do need for the future drop-downs, you need to take some additional debt, is that - that must be done at higher rates. Am I correct?

[Richard Tyrrell:]

Well, I mean, the debt that comes - the debt that's - the debt is sort of stapled to the drop-downs, so they're secured at least. So that's been handled by HLNG and HMLP inherits it. So the actual debt, which is on the assets, that are currently up in its level is on the 4% type run rate, which is actually significantly below - it's sitting significantly below where the debt is, the current secured debt at the HMLP level, which is 5 or, well, 4.8 to 5.8. So the next couple of drop-downs were probably as you have a lower cost of debt, simply because it's already in place up at the parent level and inherit that. And going forward, I think that their cost of financing will go up with rates. But as long as it doesn't go significantly above where things currently are then that will stay the same.

[Unidentified Analyst:]

Okay. Thank you very much.

[Operator:]

This concludes our…

[Richard Tyrrell:]

Right. Thank you, Robin.

[Operator:]

Sorry. 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, thanks everybody for joining the call and on the great questions. I think I'm seeing some people today at the Barclay's conference. So I look forward to catching up with those who I'm seeing today later on. And potentially also some in Houston next week, where I'll be at a slide-walk [ph] event. But if you're not going to be at either of those two events, please don't hesitate to get in touch if you have any follow-up questions.

[Operator:]

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