Höegh LNG Partners LP
Q1 2015 Earnings Call Transcript

Published: 28 May 2015

[Operator:]

Good morning, and welcome to the Hoegh LNG Partners LP first quarter 2015 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 also note, this event is being recorded. I would now like to turn the conference over to Richard Tyrrell, CEO and CFO of Hoegh LNG Partners LP. Please go ahead.

[Richard Tyrrell:]

Thank you, Andrew. And good morning, everybody, especially those in Houston where I know it’s extremely early. Well, as Andrew said, I am the CEO and CFO of Hoegh LNG Partners and I'll take you through a short presentation today before opening the lines up for questions here. Please take note of the forward-looking statements on page 2. I am moving on to page 4. I'll firstly say a couple of words about the first quarter financial highlights. HMLP reported time charter revenues of $11.5 million for first quarter 2015 compared to $29.1 million of construction contract revenues for first quarter 2014. This is the first period in which we see only time charter revenues in the revenue line. Construction related revenues haven’t fallen away post delivery of the mooring PGN in Indonesia in the last quarter. So what you see this quarter is it really what we're all about. The Adjusted EBITDA for the quarter which includes our JVs on a proportional basis and the out back for cash collection on our direct financing lease was $15.9 million compared to $8.4 million in the first quarter of 2014. In US GAAP terms we generated an operating income of $5 million, which adjust to $9 million if you exclude unrealized losses on swaps, but impacted earnings at the joint venture level. Our net income was $2.4 million or $6.7 million, if excluding the upper mentioned swaps and unrealized FX losses at the consolidated level. A slight problem with my slides presenting here, so excuse me while I just jump forward. Turning to 5 and I thought it was a good time to take a look at what our numbers meant for distribution coverage. The table in the slide includes an element of cash that was received indemnity for the parent, the non-budgeted commissioning related cost that have been disclosed previously and that relate to Indonesia. And all together you can see that the distributable cash flow is $9.6 million. This compares to our distribution for the quarter of 33.75% per unit or $8.88 million in total and equates to a coverage ratio of about 1.08 times. And I'll look to build on some of the numbers that you see here in this table as I move through the presentation. Turning to page 6, operationally all the FSRUs used in the HMLP fleet was higher for the entire quarter. The development that we look forward to is the dropdown of independence where we continue to work on the third party consents and of course formal approvals that will follow. In regards to other future dropdown candidates, that’s positive news to report on the Gallant which went operational on its 5 year contract with EGAS in Egypt on the 30th of April. The Höegh Grace which was previously the HN 2551 in my presentations has been named and continues to be earmarked for the SPEC contract in Colombia. And some very new news Höegh LNG yesterday announced a 20 year contract in Chile for Octopus which is a JV between local utility Biobiogenera and Cheniere. The contract is for an FSRU to be stationed in the Bay of Concepción which is southwest of Santiago from the second quarter of 2018. And in all, with this we now have four additional contracted FSRUs in our pipeline of future dropdown candidates. We have won some contracts in the pipeline of IPO, so it’s developing nicely. Taking our net ownership of the GDF series battled into account, where of course we have 50%, we could easily go from a net two vessels currently to a net six vessels with this pipeline which is three times up current size. Turning to the income statement on page 7. The first thing that I'd like to draw your attention to is the other items line. I have a breakdown of this later in the presentation, but for now the important number to remember is that it includes just under 600k of withholding tax in Indonesia and Singapore that has been reimbursed by the charter. Looking at this another way, the revenue and the lines below include the 600k to cover this amount and if you're modeling on a after tax basis, I think we discussed tax in the past, its an adjustment that you should make in this quarter going forward. Staying with this topic of tax we can cover the operational aspects of the assets in the next slide. The income tax that you see in the quarter is non-reimbursable as it relates to some income tax in Singapore. There was actually no income tax in Indonesia for the quarter which would have been reimbursable because of losses related to the previously disclosed troubleshooting for the EGAS equipment on Lampung. So the amount of income tax for Indonesia is expected to go up. Over time it will be reimbursable, what it does and the amount will add to the 600k of withholding tax that is flowing through the other license line, as something that comes back from this charter through revenue. Getting back to operations, I think the segmental reporting table is about a place to show how the assets are being performing, of course given our split between assets which are wholly owned and owned by the JVs. The JVs and starting with them, they are steady and there is a table in the appendix of this presentation that compares the performance of the JVs with the same quarter last year and this clearly shows that. The majority held FSRUs they are effectively just the Lampung average stage. They – or it has a slightly lower margin then I would like to see because of the spot start up cost, but its trending well. I'd though say that the cost in the other category as well are slightly elevated at this stage because of the implementation of SOX and that is something that will moderate if not go away entirely over time. The other thing which you can see in this table if you want to make the adjustment which I mentioned on my opening highlight stage, are the large swap impacts of almost $4 million in the JVs. Page number 9 has a breakdown of the financial income and expense. This will help you tie some of the numbers back to the distributable cash flow that we saw earlier. It also shows a breakdown of the other items. And as you can see a lot component is related to that unrealized foreign exchange loss that I corrected for upfront and the other large component is related to the withholding tax number just under 600k of which is reimbursable as mentioned. Turning to slide 10, and the balance sheet, as you can see the balance sheet is relatively stable. We will see a bit of cleaning up as the various project finance related accounts in Indonesia gets released, but otherwise I don’t think there is much to report, other than of course, it is also impacted by that March market on the swaps and the JVs. So to summarize, I believe this is been a very sound quarter operationally and it’s been very good quarter from perspective of the pipeline dropdown candidates growing. The fleet is modeled and it’s very much set to remain modeled with all the dropdown candidates being new build FSRUs. The charters are long-term and it’s definitely nice to see another 20 year contract in the pipeline. And in addition, the charter being Octopus LNG of which Cheniere is part I think just exemplifies the meeting utility and industry customer base, but are the counterpart for our contracts. Now, I've said this before, but I'll just reemphasize it again, the contracts are fixed and stable which makes them very well suited to the MLPs and the backlog of contracts is certainly developing into something that will propel our growth going forward. I often get asked the question, where do we see further growth coming from? And the last slide on page 12 indicates the answer to that. In Latin America is where we just obviously announced a contract. We see other tendering activity in Latin America and we see more contracts coming out of that particular geographic region. I think if anything, the projections that the IEA and people put on Latin American consumption of LNG understate the potential is just got a geography which is so well suited to FSRUs with obviously large population centers scattered around the case, but necessarily connected to pipeline. We're also seeing activity in Asia and China. NGL and China obviously a huge market, but there are of significant markets there similar to Latin America. There is lot of people living on the coast which makes the FSRUs particularly well suited to that region, so would expect to see more activity there. On that note, I think that’s all I got to say. We're obviously pleased with the business as its developing. And with that I'd like to open it up for any questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Christian Wetherbee of Citigroup. Please go ahead.

[Unidentified Analyst:]

Good morning or good afternoon. Actually this is Prushance in for Chris.

[Richard Tyrrell:]

Hi.

[Unidentified Analyst:]

Hi. How are you? Good, how are you doing? My first question on the Independence, I know it's tough to pin down maybe a dropdown time at this point, but if you could give us a sense roughly of the timeline for the prerequisites or contingencies that need to be checked off before or maybe just walk us through a little bit more detail on those before the first half of the Independence drops?

[Richard Tyrrell:]

It’s a bit difficult for me to go through them into much detail on the call. But we clearly have been working on it for a long time now. So it shouldn’t be too far away.

[Unidentified Analyst:]

So, I mean, maybe think of it, would it be safe to think of this is a more of a 3Q event now or too early to say?

[Richard Tyrrell:]

It’s a little bit early to say, but I am optimistically [indiscernible] to do that.

[Unidentified Analyst:]

Okay. On the -- and I'm switching to Gallant for a minute, obviously great news on the Egypt contract. You had said, I think, previously we thought about this as a 3Q, 4Q dropdown. Is there a chance that that becomes a little bit earlier in your view? Just thinking about how this might be almost the timing that might work out to be concurrent with the first half of the Independence or around the same time? So trying to get a rough sense of how the cadence is going to work out this year.

[Richard Tyrrell:]

Yes, I don’t think it will be at the same time as the first part of independence. The first part of independence will be funded with the – it’s actually the proceeds of the IPO which at the moment are on line up to the parent and we're greatly receiving the interest payments on that wealth while we're waiting. So that is dropdown which will require a - or shouldn’t require a follow up. So I think that we can do by pretty much other than when we can. To do a dropdown of the Gallant before, let's say the end of September, early October we would have to do a full filing with the SEC in order to raise the follow on equity and that’s a bit complicated. So you know, in likelihood, we'll look to find a shelf and push it up to 12 months from being a public company and then announce the dropdown and the associated follow on.

[Unidentified Analyst:]

Okay. Excellent. And then for the Grace, that's also a very constructive news. Any thoughts around how we should think about the funding for that? And then sort of a related question, turning more to the broader market picture. I know there's volatility in the LNG market has been with us for a little while now but are we seeing any effect on vessel valuations? Or is that not really a sensitivity that's on the table right now?

[Richard Tyrrell:]

Well, I mean, on the Grace, firstly that will be up next year – next years business from a dropdown point of view. From a market standpoint, and the LNG market doesn’t move that quickly. So it’s hard to necessarily point to a whole load of tangible things in regards to how the oil price fall has impacted the market. But from a sort of more anecdotal point of view, we definitely see more enquires from the LNG markets and clearly there is lower oil prices also led to a lower LNG price which makes it more affordable and obviously spurs the demand for infrastructure which is good thing rather than a bad thing from our point of view. So we are I think very optimistic about the FSRU space and I don’t think there is significant amount of runway before the opportunity start to slow down.

[Unidentified Analyst:]

That’s great. And then just one final question in tune of touching upon what you brought up. We talked about we'd seen an increase in the inquiry levels last quarter, sequentially. Have you seen a step up as well given where the economics are right now? You mentioned that in your last answer, but to get a sense of potentially how much more activity we could see as also with an eye to the correction or a balancing in the LNG carriers exiting 2015, at least the ones that are available for spot. Trying to get a sense of how that equilibrium plays and then with inquiry levels for new FSRUs?

[Richard Tyrrell:]

Yes, I mean, we tend to be very much focused on the FSRUs where you know, still a relatively young market and I am not sure that the numbers are sort of statistically significant. But we've ourselves to get awarded three contracts since we IPOs and we see the potential for that kind of run rate of contract awards to be maintained and I don’t think certainly its sort of underlying fundamentals to support them.

[Unidentified Analyst:]

Excellent. Well, thank you so much for the time. I should appreciate it. I'll turn it over.

[Richard Tyrrell:]

You're welcome.

[Operator:]

The next question comes from Spiro Dounis of UBS Securities. Please go ahead.

[Spiro Dounis:]

Yes. Good evening, Richard.

[Richard Tyrrell:]

Hey. Spiro, how are you?

[Spiro Dounis:]

I am too bad. So I guess you've seen various charter tenures locked up recently anywhere from 5 to 20 years. Was wondering if you can give us a sense for the appetite out there to do more 20-year charters, trying to figure out if there's general trend or consensus when it comes to what tenure is in demand right now.

[Richard Tyrrell:]

Again, I don’t think there is any statistics which are really kind of meaningful on that. Its very customer specific and in the case of the most recent contracts they are able to playing gas or power station which will have sort of I guess a life span of that kind of duration. So they want to match every thing up. In the case of Egypt, we were up sort of limited by public shipment rules for the 5 years and then you see current 2015 in between. And I think our general feeling is that the customers are looking for long-term solutions. They aren’t sort of looking to put these trends of FSRUs in place as a front runner to launch solution typically for example. So that points to a longer term kind of model I guess in a short term model. But there is always going to be exceptions.

[Spiro Dounis:]

Sure. Okay, really makes sense. And just as FSRUs increase in popularity and really new entrants are going to come into the market, just wondering if you're finding that as you go to bid, do you see a lot of new faces and if you think competition is getting more fierce or are there so many potential projects out there that no one is really willing to sacrifice return right now to win a bid?

[Richard Tyrrell:]

We also see the three main competitors [indiscernible] every tender, I mean, there is public tender as well. So there is no secret. A lot of other LNG carrier focused companies have suggested they are looking. So far we haven’t actually seen any up business traits or new entrants, which I think just can shows that there are certain barriers to entry and the FSRUs category which maybe then apply to the carrier space. But I am sure that will change over time, and certainly not complacent.

[Spiro Dounis:]

Got it. And then just one last general housekeeping on the withholding tax. So you mentioned the $600,000 is probably going to be going up. And I realize it gets offset and so it doesn't really matter that much but for modeling purposes, trying to get a sense of the magnitude for how much it will go up each year and at some point does it plateau?

[Richard Tyrrell:]

Actually the withholding tax that will pretty stay pretty much constant.

[Spiro Dounis:]

That will stay constant. Got it.

[Richard Tyrrell:]

Yes. What will go up is that once we starting to pay tax locally in Indonesia then you'll see some corporate tax which will be passed on. But it will flow through the income tax line as opposed to the other license one.

[Spiro Dounis:]

Okay. Got it. So will we see a similar offset where revenues a little bit higher and then income tax a little but higher but it offsets? Or will it all flow through the bottom line?

[Richard Tyrrell:]

The former.

[Spiro Dounis:]

Former. Got it. Great. That’s it from me. Thanks, Richard.

[Richard Tyrrell:]

Great.

[Operator:]

The next question comes from Matthias Detjen of Morgan Stanley. Please go ahead.

[Matthias Detjen:]

Good morning, Richard, so we've talked a lot about the contacts already but I was wondering if you could maybe give us a bit more color about how the most recent contract came about? And what the lead time is for a contract like that, and to give us a sense how long it would take to let go for the next one? And I guess the follow up to that is also where – what the next leeward [ph] slot for an FSRU would be and if you were to go and order one now when you would be able to get the next FSRU new build?

[Richard Tyrrell:]

Yes, sure Matthias. Thanks for the question. On the length it probably take to negotiate a contract, and it can be anything from 6 to 8 months through to 18 months plus. This particular contract was probably I guess in the middle of that range and the delivery date is not until the second quarter of 2018. So I guess there wasn’t sort of massive rush on, as I had to get best something signed up. It’s obviously going to be taking LNG from the US. So it is variable. But if you look at Egypt, we haven’t – they put that asset forward front up and signed in October that’s processed before that obviously and then the asset went on line at the end of April. So that’s just roughly about starting you can get one of these assets on stream. But I think it is a project that people are really going to pay attention to because that is being really heavily utilized and you see the Egyptians going out and going out to tender for additional cargos of LNG. They've even announced they are potential second FSRU. And for the markets where there is a sort of real need matching it. So LNG and tax you can put that asset in place very, very quickly. And from yard point of view, the lead time is still around 28 months and I think there is reasonable capacity at the yards right now, and certainly non-inflation and cost. So the picture there I'd says is fairly perfect.

[Matthias Detjen:]

Okay. And are you seeing quite a few tenders like this where you sort of have US gas being sold and you actually were the seller of the US gas is also being as involved like here with Cheniere or do you have other tenders like that you're seeing as well in the market?

[Richard Tyrrell:]

Yes, I mean, definitely and for example the Australia [ph] project at this stage, but there's the Port Meridian projects in the UK were they have announced as an off take. And I think they would look – source the gas predominantly from the US market. I am not sure that got any sort of US companies actually sort of invested in the project I would say. But I think they have got sort of MOUs in place to supply the gas with the various Gulf of Mexico suppliers.

[Matthias Detjen:]

Okay. Well, thank you. That was it from me.

[Operator:]

The next question comes from Richard Diamond from Strait Lane Capital. Please go ahead.

[Richard Diamond:]

Good morning, Richard. First, I would like to compliment you on a great job delivering on the promises for the most part of the IPO. And I am sure you more than anyone else would have liked to announced a dropdown of the first half of the Independence. Can you confirm that the delays are not being caused by operational issues or potential opposition to MLPs, that's on the first part? And the second part is as we go forward, should we expect the same type of delays for future dropdowns or is the Independence sort of unique in the mix because it was done so long ago? Thank you.

[Richard Tyrrell:]

Yes, Richard. Thanks for the question. It’s absolutely the latter. The Independence was a contract that was signed before the MLP was own or really even properly structured. So unfortunately it didn’t kind of fall under the assignment language which would normally allow you to transfer something to an affiliate for example and that contractually was quite a challenge. I won't go into details, but contractually it was quite a challenge. Of course now we know how the MLP is structured and obviously we have a board and so on. We could be very kind of upfront in the new contracts and make it very clear that we have the right to – we the parent have the right to sign to the MLP subject to the board approval and committee approval and all the other things which we see MLP move in order to have got the job done. So that’s where we are on Independence. It’s nothing to do with the operations or any sort of issues with MLP as such.

[Richard Diamond:]

All right. And one more question, I just want to know, are you – just your perception, are you making headway with investors who are confusing HMLP and FSRUs with – which have great prospects going forward and are not energy price dependent with LNG carriers, which are currently over supplied?

[Richard Tyrrell:]

It’s something we are very focused on from a point of view of trying to educate the investors. I think certainly everyone on this call will be very clear on that and I think people are getting the message, but you're absolutely right when it comes to new investors that’s a key differentiation that we go out of our way to make.

[Richard Diamond:]

Thank you very much, Richard, and I compliment you on all of the great work you're doing. Thank you.

[Richard Tyrrell:]

Thank you.

[Operator:]

[Operator Instructions] The next question comes from Shawn Collins of Bank of America. Please go ahead.

[Shawn Collins:]

Hey, great. Thank you. Good morning, good afternoon. Richard how are you?

[Richard Tyrrell:]

Well, thanks. Shawn, how are you?

[Shawn Collins:]

Good. I am great. Thanks. Richard, on the GDF Suez Neptune, I'm looking at your slides from an earlier presentation, and the Neptune is currently trading as an LNG carrier. Can you remind me, is that a new development or has it always been that situation?

[Richard Tyrrell:]

No, its actually always in that situation with the Neptune and it just that the modification actually its going FSRU job, but whatever its doing its make any difference to us because that’s kind of GDF services or Energy’s business as they now call themselves.

[Shawn Collins:]

Okay. Understand. That's helpful. Thank you. And then a second question, so you obviously had some slow start up and some delays around the Lampung FSRU. Can you mention a few things that you might have learned from the experience or if there's anything that you might do differently as a result of the experience or maybe it was unavoidable and you would not do things differently, if you could provide some context around that.

[Richard Tyrrell:]

Yes, I think one of the reasons why there was so much noise flowing through the MLPs results from the Lampung was simply fact that there was an asset that was sort of in the fleet, sort of from day one. So you've got all the kind of legacy construction period flowing through the accounts. With new vessels we won't have that because we will be acquiring them and then fair market sort of accounting for them which will mean to not avoid it. I think with the newer vessels, well certainly in the case of Independence that’s being operational now for few months, so there is a good track record there of performance. I think on Gallant we always said that we would like a few months of performance there as well and before we actually drop it down. So I guess what I am trying to say is that where we kind of delay the drop down until couple of months after the start up then it should sort of operate these kinds of noise that we have at Lampung.

[Shawn Collins:]

Okay. Understand that. That's helpful, great. And my last question, long contracts, off take contracts for LNG are largely done on a private basis and usually in Asia, spot prices are down 60%. I'm wondering if you have – if you're aware of any recent long-term contracts that have been signed and if you can provide any color on that whether it’s pricing or duration or anything of that nature?

[Richard Tyrrell:]

This question is I've been asking myself, I can't provide an answer there. Let me check and see what anyone else internally knows. But I think the answer is going to be there hasn’t been lot of long-term contract signed recently because there is process of price discovery getting on and the buyers, especially new buyers to the market haven’t quite figured out how much they should be paying in this lower pricing environment.

[Shawn Collins:]

Sure, sure. The steep drop in volatility has caused some pause, that's been our observation but was interested in comparing with your observations.

[Richard Tyrrell:]

That’s going to be difficult someone to buy – to enter into a contract of whatever $11 on long-term basis. We can see in this spot market its costing $7.

[Shawn Collins:]

Yes, absolutely. Okay, that's all for me. Thank you very much for the time and the insight, Richard, I appreciate it.

[Richard Tyrrell:]

Thanks a lot Shawn.

[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:]

Thank you, Andrew. And thank you to everybody for joining the call. I look forward to speaking again soon.

[Operator:]

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