Höegh LNG Partners LP
Q4 2015 Earnings Call Transcript

Published: 29 Feb 2016

[Operator:]

Good morning and welcome to the Höegh LNG Partners Fourth Quarter 2015 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please also note, today's event is being recorded. I would now like to turn the conference over to Richard Tyrrell, CEO and CFO. Please go ahead.

[Richard Tyrrell:]

Thank you, Rocco. And in fact, good morning ladies and gentlemen. Welcome to the Höegh LNG Partners' fourth quarter 2015 financial results. Please take note of the forward-looking statements on Page 2. And then turning to Page 4, at start of the agenda and I'm going to be starting with a presentation of the results before opening it up to Q&A. Page 5 lists Höegh LNG Partners fourth quarter 2015 highlights. Before I run through the list, let me remind everyone that this is the first quarter to benefit from your contribution of Höegh Gallant patented fleet on October 1. HMLP reported time charter revenues of $23.4 million for the fourth quarter of 2015, compared to $13.1 million of time charter revenue on $6.7 million of construction contract revenues for the fourth quarter of 2014. It generated operating income of $22.2 million for the fourth quarter of 2015 compared to $10.9 million for the fourth quarter of 2014. Reported net income was $16.5 million, compared to $7.5 million for the fourth quarter of 2014. For net income excluding unrealized gains on derivative instruments was $10.6 million compared to a comparable ex-construction contracts figure of $5.3 million for the fourth quarter of 2014. The adjusted EBITDA that includes our equity accounted JVs on a proportional basis was $27.1 million for the fourth quarter of 2015 compared to $24.5 million for the fourth quarter of 2014. Without the construction contract revenue 2014 was $15.7 million for our like-for-like comparison. Distributable cash flow for the period was $12.9 million, and this compares to a distribution of $10.96 million. This distribution represents a 22% increase on the third quarter of 2015 to $0.4125 per unit or $1.65 per unit annualized. After the end of the quarter Höegh LNG Partners has agreed with Höegh LNG to extend the Gallant Seller's Credit and the currently undrawn Revolving Credit Facility to January 1, 2020. The extensions demonstrate Höegh LNG's continued strong commitment to Höegh LNG Partners. The facilities still can be repaid at any time at the discretion of Höegh LNG Partners and would expect to refinance them well in advance of the new maturity types. So let's take a look behind the numbers. Our four assets can be seen on Page 6. That will perform according to contract and that means we've had a full course of charter revenues from each. Moreover, the recapture rates across the fleet reach to record levels and more LNG cargos were transferred to force [ph] than ever before. The levels of usage don't affect our revenue but they show the attractiveness of LNG at the day's prices. And I'm pleased to see our customers benefiting. Also, the safe operations through the high level of activity are credits to our operations team. The recently acquired at a 100% owned Höegh Gallant joins the PGN FSRU Lampung and our majority help FSRU segment which the GDS vessels continue to contribute to our joint venture segment but is consolidated using the equity method. Turning to Page 7, we can see how the contracted revenues on our current fleet can be expected to be maintained. The average remaining contract length on the fleet is 14-years, and in equal importance, we have contracted revenue on all vessels until 2025. Very few MLPs have such strong contracted foundations, and there is more to come from the dropdown pipeline that we're aiming to make further progress on in the second half. Page 8 is a slide that I've been waiting to put together for a few quarters. We now have enough for it to be relevant. It shows the real stability of our contraction revenue but just to remind everybody, it's based on a higher rate and in nowhere exposed to commodity prices or throughput. The adjusted EBITDA was consistent for the first three quarters of 2015, and went up by $10 million in the fourth quarter with the arrival of Gallant. This is in line with our $39 million to $41 million guidance set for the assets at the time of acquisition. The adjusted net income that removes the effects of our interest rate swaps including the share of derivative south by joint ventures, sounds a similar story. One is stability and dropdown driven growth. Distributable cash flow reached $12.9 million in the quarter, and the coverage ratio increased as planned even after the distribution increase of 22%. Page 9 looks to the income statements in more detail. Time charter revenue has picked year-on-year because of the arrival of the Gallant. It's important to note however that it excludes approximately $600,000 of amortization for what has been assessed to be its favorable time charter. This amount is added back in the adjusted EBITDA and distributable cash flow later. Legacy construction revenue that was related to the more [ph] that was sold to PGN has fallen away, as have the costs. And we don't have the voyage expenses from our cost incurred related to Lampung during commissioning period that we saw of this time in 2014. Gallant closed their shares up in the depreciation and amortization line. Unlike Lampung, Gallant with a shorter term contract is not considered a financial lease under US GAAP. And it is accounted for as a more straightforward operational lease. The depreciation of Gallant reflects the purchase price allocation that it set out in our press release. It includes the vessel, depreciated overall 35-year life assumption, and an element that is associated with dry docking. In the case of Gallant, dry docking is for our own account unlike for the JV vessels where it's covered by the customer, and the Lampung where it's only an every 20-year event. This quarter we lose the benefit of the interest income on the $140 million demand note with Höegh LNG, having used the note to part pay for Gallant. The reported net income is $16.5 million or as mentioned in my opening remarks, $10.6 million after excluding swaps at both the consolidated and JV levels. From Page 10, the income statement is broken down into our segments. As you'd expect given the Gallant is consolidated, many of the elements highlighted in the income statement flow into the majority Höegh FSRU category. Elsewhere, the report shows the great consistency of our JVs. It also shows operating expenses that in the other category are affectively SG&A which are slightly elevated above where we'd expected them to be going forward, and this is because of the restatement in the fourth quarter and the high associated orders and legal costs. These additional costs amounted to approximately $450,000 and have been refunded in our indemnity from Höegh LNG along with an additional amount relating to withholding tax. The total indemnity claim of $751,000 does not appear in the income statement, but would mostly later in distributable cash flow. Page 11 has the comparative numbers for 2014. And turning to Page 12 we have additional details on our financial interest and expense. Interest income has dropped since the demand note was used to pay for part of the Gallant acquisition. Interest expense is also up since we've assumed the Gallant loan. The all in fix cash interest on the facility, including the swaps, is 4.7%, and the principal outstanding as of the end of the year was $180 million. As part of the purchase price allocation, the debt has been adjusted to fair value on our balance sheet. The fair value adjustment is amortized to interest expense using the effective interest method. The distributable cash flow is adjusted for the non-cash amortization, accordingly. Page 13 has the reconciliation of the distributable cash flow. It went back from reported net income to the proportional measure of segment EBITDA which after having back the principal repayment on Lampung's direct financing lease and this quarter, the amortization of revenue on what was deemed to be Gallant's above market contract gets you to adjusted EBITDA of $27 million. This represents an annualized run rate of $108 million. The bottom half of the table deducts financial cash costs, a gain on the proportional basis before adding in the indemnity payment for the price of the quarter and deducted, estimated replacement capital expenditures. The estimated replacement capital expenditures are increased in this quarter to reflect the arrival of gallant. The amount added is based upon how much we need to set aside each quarter to be able to repay debt over the vessel's life and fund the equity proportion of a new vessel at the end of the vessel's life plus the cost of dry docking. We were previously running at around $10 million of annual replacement CapEx, and this is now $15.5 million. And focusing to context, we've gone from a net 2 assets possession, taking 50%; we own an each of the JV assets to a net 3 asset possession. And stock increase is a merit in valued terms by the replacement CapEx. The $12.9 million distributable cash flow compares to our distribution of just under $11 million and equates to a 1.18 times coverage ratio Page 14 shows the balance sheets for the end of the period and of course includes the Gallant, the details of which can be found in the purchase price allocation table of the press release. Lastly, I want to summarize HMLPs proposition going forward. Firstly, we have a modern technically advanced fleet which means obsolescence is not a major concern. Secondly, we have long term charters with an average remaining contract life of 14 years, and no vessels coming off higher until 2025. Our counter parties are strong, and with them being at the delivery end of the LNG valued chain they're starting to benefit from low LNG prices. The contracts are fixed and we have no quality exposure. In most cases the contracts are further the risk by OpEx pass-through or a partial OpEx pass-through. The pipeline of candidates is well matched, we believe for the current market capacity for those transactions. And the FSRU fundamentals remain strong, and of course that's what matters to growth and ultimately the re-contracting of our vessels. We believe we have a solid platform from which to build the business with none of the issues that have been seen elsewhere in the sector such as funded capital commitments and certain contract coverage and net debt insurities. On that note, I'd like to turn it over to Q&A. Rocco may I ask that you open the lines for questions.

[Operator:]

Yes sir. We will not begin the question and answer session. [Operator Instructions] Our first question comes from Chris Wetherbee of Citi. Please go ahead.

[Prashant Nair:]

Hi Richard, this is Prashant in for Chris. How are you?

[Richard Tyrrell:]

Good, thanks. Hi, Prashant.

[Prashant Nair:]

So congrats on the first quarter with the Gallant. That's great to see. I wanted to, not to get ahead of ourselves with turn to this year, if you could give us an update on the Independence progress and if there is any change to when we expect to start to see the results as 2Q, so a fair assessment, and any sort of incremental detail there would be helpful.

[Richard Tyrrell:]

It could be soon in Q2, but I think more likely I think Q3 for the next dropdown. Whether it's Independence or Grace, well, depends purely on whether we have the consent. Now is still not the right time for the customer. So it's not going to be today, but from a documentation point of view we have the things in place. So, yes, could it be soon? Yes, yes it could. If it doesn't come, then just Gallant sort of overtook it in the Q. We could easily see Grace overtaking it in the Q, and Grace will be on higher midway through the third quarter, to give you a sense or whatnot we'll be eligible for dropdown.

[Prashant Nair:]

Okay, that's helpful. And funding wise, will we think of the Grace substituting in for the Independence then from a funding standpoint or would there need to be any additional capital raised?

[Richard Tyrrell:]

I think we'd end up shuffling the Q. As of today I think we've seen capacity constraints for how much you can do it all at once. There might be also for the strategic considerations around how much you want to do all at once, given the price that which you're assuring the equity. And when the time comes, well sort of look at both those elements and make the adjustments accordingly.

[Prashant Nair:]

Okay, that helps. So, obviously then, strategically, to keep constraint on equity. Right now, can you give me the HMLP market, that's completely understandable? Turning to sort of the economics of SSR use and sort of the differentiated story here. Is there, do you send, I guess qualitatively, with the narratives or the stories, you get them to be understood or it's a bit differentiated given it's not necessarily affected by midstream and upstream head winds in the same way. And related to that, is there any sort of upward pressure on asset prices? I'm thinking about this related to future dropdowns as well, as we start to see that these are long term contracting vessels that continue to be in demand especially on a low commodity environment.

[Richard Tyrrell:]

Yes, I think already it is somewhat differentiated story, and that we have longer term contracts, and I think on the whole customers they are in good shape and that's the benefit from lower commodity prices as opposed to what you see elsewhere in the MLP market where the customers are hurting because of the other end of the valued chain. So there are good reasons for this - from that as I use to - I think the differentiated within an MLP type structure. I think there are good assets to put in in the first place, and I think the way the market has gone only supports that assessment.

[Prashant Nair:]

Certainly, and the sellers credit is part of the financing for the Gallant. It causes a good load of confidence in - from UK as to the long term viability. Just last question, could we see further credits or give me a little bit more differentiation and where come funding comes from for future dropdowns given that the equity market is challenging?

[Richard Tyrrell:]

I think given these assets are large relative to our current size, it's very difficult to see how we're going to get away from at least some equity and I think we necessarily have a whole load of debt capacity on the balance sheet to fall back on. So I think we are going to be dependent on equity, and I hope now building up a track record that people are really seeing the consistency of these sorts of assets and we'll get some valued accordingly, and we'd be able to fund the growth. However, one thing that we are seeing on the debt side is an extremely competitive financings out there. And Höegh LNG announced today that they've financed the seventh vessel at 3.8% on a fully swapped basis which is considerably below where the Legacy assets are funded. So, well equity might have gone a bit more expensive, I think the cost of capital may actually be compensated for by the price of the debt that's were sitting in this market.

[Prashant Nair:]

That's very helpful. Richard, thanks very much. I'll turn it over.

[Richard Tyrrell:]

Thanks Prashant.

[Operator:]

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

[Fotis Giannakoulis:]

Yes. Hi, Richard. Congratulations for the good quarter. I want to point out on the extension of the intercompany loans until 2020. Can you give us a little bit more color what comes down there, are there any sort of any changes in the terms of this loan or is that a simple extension, that eliminates any funding risk until 2020?

[Richard Tyrrell:]

It's a pure extension. There's no change to any other terms. In the case of the year revolver, the MLP has been paying not inconsiderable commitment fee, not on anyone to keep them draw it. So I think it was early fab and it's pushed out a little bit in process of the intention. With that facility is to refinance it once the headroom is freed up at the asset level from the amortizations on the debt. So that I think was just a practical common sense thing to want to do. The seller's credit, we originally envisaged effectively replacing it with equity giving capacity limitations in the equity market. Yes, we decided that having to over equitize the next dropdown in order to repay that as well. It might not be the best thing to do and we've also seen some opportunities to refinance it externally as well, and I think there will be options to do something with the well and advanced maturity date. But we felt that giving ourselves the time was the thing to do.

[Fotis Giannakoulis:]

Thank you, Richard. Now with this intercompany loan overseeing remove the dividend, and solidify for the next few years. How do you see the dividend growth going forward? I'm talking about new dropdowns and potentially with your stock moving a little bit higher. How shall we think of the incremental free cash flow that, let's say, the Independence dropdown is going to bring to the company? In relation to the repayment of these intercompany loans, shall we assume that the dividend accretion might be a little bit lesser, and part of this incremental cash flow from any additional dropdown will be allocated for the repayments of these loans?

[Richard Tyrrell:]

I don't think it will be allocated for that purpose, no. I think, clearly we're not going to be able to increase the distribution bind of the 22%, and the reason why that was so high was because it was funded predominantly with the IPO proceeds that were our loan up to the parents. So what we can increase the distribution by, well, the function of course of the price that which we can issue equity and we hope the price goes up and we can issue equity at a good price, and then price we have to pay for the asset. And those are the two parameters that will drive the increase and distribution. I'm thinking we have given the position, we'll just guide on that at the stage, but those are the two things that will drive the number.

[Fotis Giannakoulis:]

Thank you, Richard. I want to ask you also about the FSRU market. Prices for, LNG prices are very low. There is a lot of discussion about renewed interest for new tenders. Can you give us some color what kind of tenders there are out there, when do we expect to share more news about fixing your open vessel that is of your parent? And how much do you expect that the new FSRUs can absorb in terms of LNG demands in the next three or four years.

[Richard Tyrrell:]

Sure. Well I think on the one hand the fundamentals are exceptionally strong, but on the other you have the global economy is slightly soft and volatile. So the demand is there, but in volatile markets the willingness or the credit maybe to enter into long term contracts maybe isn't. So I think HLNG have commented on that being fixed tenders out there at the moment. I think in a robust global economy they could all be expected to announce this year. In all likelihood we'll see at least a few of those slip. So how many FSRUs to receiving awarded this year, probably between three or four, how many will parent win hopefully one to two. And obviously with the vessel that they have expect being delivered at the end of the first quarter 2017. They'll be wanting to have a contract in place for that well in advance of its delivery.

[Fotis Giannakoulis:]

Thank you very much, Richard, and congratulations for the good quarter.

[Richard Tyrrell:]

You're welcome. Many thanks.

[Operator:]

[Operator Instruction] Our next question comes from Sunil Sibal of Seaport Global. Please go ahead.

[Sunil Sibal:]

Hi, Richard and congrats on a good quarter.

[Richard Tyrrell:]

Hi, Sunil. Thanks.

[Sunil Sibal:]

Yes, most of my questions have been addressed. I just was curious in terms of the financing, we've seen a few MLPs being able to go to - send of kind of a little bit of unconventional pool of capital, i.e., perpetual preferred kind of equity, and I was curious in terms of what you're seeing in market out there? Is that private equity kind of market as labeled for FSRU or their shipping, MLP, about assets?

[Richard Tyrrell:]

I'm certainly having a lot of calls from private equity, tight offering, that kind of product. Yes, I think ultimately whether if something would be interested in will depend on the pricing. I think strategically increasing the common unit base and liquidity in the common units is maybe more of a priority than introducing another level of capital into the structure as I think I've said before. But when we're ready for the dropdown, if it's out of particularly attractive price then, yes of course it is something that we will consider. It's certainly something that seems to be out there and we're having a lot of inquiries.

[Sunil Sibal:]

Okay, thanks. That's all I had, and again congrats on a good quarter and good luck.

[Richard Tyrrell:]

Thank you very much, Sunil.

[Operator:]

And our next question comes from Sean Cohen's of BAMO [ph]. Please go ahead.

[Unidentified Analyst:]

Great, thank you. Hi, Richard, good morning. I hope you're well.

[Richard Tyrrell:]

Hey, Sean. Thanks. And you?

[Unidentified Analyst:]

Thank you. I appreciate that. So I wanted to ask about the GDF Neptune. I know it's operating now as an LNG carrier which clearly shows the versatility and flexibility of an FSRU. But I know it was previously an FSRU and I think it was based in Massachusetts. Do you have any sense of the dynamic of the client that GDF as to why it is operating as LNG carrier now as opposed to an FSRU?

[Richard Tyrrell:]

Yes, and it was supposed to go down to Uruguay which is a project that they pulled out of, and now they're looking for another FSRU role for the Neptune and hopefully a number of opportunities that they're choosing.

[Unidentified Analyst:]

Okay. I understand. And is it your sense that they continue to chase opportunities in Latin America or they're chasing opportunities also in other parts of the globe.

[Richard Tyrrell:]

Certainly in Latin America but also elsewhere, and they have, of course when they look at things I think they, as a commodity how old are they and the utility for the, really, both ends of the valued chain. They have a lot of options and as far as I understand they're looking globally.

[Unidentified Analyst:]

Okay, great. Thank you. And then I wanted to turn to your seller's credit in revolver that you rolled over. I think, tell me if I'm correct, but I think you said you plan to refinance the revolver, and then if that's right I want to ask do you plan to refinance the sellers credit or do you plan to leave that in as permanent capital until 2020?

[Richard Tyrrell:]

I think at the right price we'd certainly refinance the seller's credit. It's costing 8%, and so anything less than that I think would be good. Yes, when it comes to the revolver it's not even drawn at the moment, so nothing to refinance. But once we get to the point in time where there's a meaningful amount, we'll also look at refinancing that.

[Unidentified Analyst:]

Okay, got you. That's great. And then, so obviously the equity markets continue to be particularly choppy. Your data point on the sponsor refinancing at lower rates was very interesting and was news to me. How would you characterize the debt capital markets where you guys are or the bank capital markets and what the tone of some of the conversation or negotiations that you've had recently?

[Richard Tyrrell:]

Yes, I think that's the numbers that I've referred to bank financing. So I think that's where the markets continue to be strong. I think the capital markets as you read their equity have come off somewhat on where they were. But we do obviously see interest still, especially from people who maybe aren't quite the same pressure to continually mark things to market as is the case in many of the capital market type investors.

[Unidentified Analyst:]

I understand. That's great. That's all for me. That was helpful. Thank you for the time and answer Richard.

[Richard Tyrrell:]

You're welcome. Thanks Sean.

[Operator:]

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Tyrrell for any closing remarks.

[Richard Tyrrell:]

Well, I'll end the conference by saying thank you for everybody and thanks for listening, for great questions. And have a good week.

[Operator:]

And thank you sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may disconnect your lines and have a wonderful day.