Höegh LNG Partners LP
Q1 2016 Earnings Call Transcript

Published: 31 May 2016

[Operator:]

Good morning and welcome to the Höegh LNG Partners First Quarter 2016 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Richard Tyrrell, CEO and CFO of Höegh LNG Partners. Please go ahead.

[Richard Tyrrell:]

Thank you, Emily. Ladies and gentle good morning, I hope you had a good Memorial Day and welcome to the Höegh LNG Partners' first quarter 2016 financial results presentation. Please take note of the forward-looking statements and glossary sections. And without further ado, I’ll move on to Page 5 and the highlights. Höegh LNG Partners reported time charter revenues of $21.7 million for the first quarter of 2016, compared to $11.5 million of time charter revenues for the first quarter of 2015, reflecting the successful drop down of the FSRU Höegh Gallant. This is up to a negative 1.5 million impact from scheduled maintenance on the Gallants. Scheduled to be advance of the busy ethane season and driven by highly and somewhat less contract flexibility on maintenance than we are accustomed to on our weather contracts. We generated operating income of $6.2 million for the first quarter of 2016, compared to $5 million for the first quarter of 2015 and a net loss of 1 million. The net loss is after a negative $9 million mark to market on the swaps at the joint venture level for which we don’t apply hedge contain. Because our hedges are over the contract life, of which there are still fourteen years remaining, we see fix swings when interest rate expectations change as they did in the first quarter. The net income excluding unrealized losses on derivative instruments was $7.6 million, compared to $6.4 million for the first quarter of 2015. After further adjusting the foreign exchange, the net income was $8 million compared to $6.8 million in the first quarter of ’15, the FX adjustments related to a strengthening Indonesian Rupiah in the quarter and local currency tax liabilities and the step down in the Egyptian pound that affected local currency working capital. Moving on to our non-GAAP financial measures, Höegh's Partners generated an adjusted EBITDA of $25.2 million for the first quarter of 2016, compared to $15.9 for the first quarter of the 2015. Distributable cash flow for the quarter came that at $11 million, which is in line with our distribution for the quarter, albeit affected by the 1.5 million impact of the scheduled maintenance on the Gallant that I referred to previously. Turning to Page 6, I wanted to remind everybody of how Höegh LNG Partners provides critical energy infrastructure on a global basis. The units we have in our fleet are floating LNG import terminals or FSRUs as they are called in the industry. We have the PGN FSRU Lampung that is located offshore Sumatra, Indonesia, serving triple play liquid fuels domestic LNG to support electricity demand. The Höegh Gallant is one of two FSRUs chartered by EGAS to cover a deficit in domestic gas supply. The GDFS Cape Ann is employed as China’s first FSRU located in Tianjin, China to cover industrial demand for natural gas and to replace liquid fuels. And GDFS Neptune is operating as an LNG carrier as part of Engie’s portfolio under a 20-year contract. Page 7 shows how quickly this market is developing and the benefits to our customers of having access to the LNG market. The chart is on the H LNG group level, which means it includes Independence. It excludes Gallant which started operations in the second quarter of 2015, but were it to be shown, you’d see another large [indiscernible] in the right hand, since it has been operating at close to maximum utilization from day one of its contracts. Countries and customers with FSRUs in operation are incentivized to increase imports since LNG is available at lower costs than alternatives. The message to new customers is clear, look how you could benefit from having an FSRU in place and accessing the abundant supplies of attractively priced LNG that is available. Page 8 shows how importers are responding. They prefer the low cost and fast track alternative of using FSRUs over land based alternatives with more than two out of three favoring floating terminals. Across new regions [ph] capacity that amount to a 35% increase in installed capacities over the last six years. Page 9 gets us back to the HLNG partners fleet and looks duration [ph]. As of the 31st of March 2016, our contracts have an average remaining length of a fraction under 14 years with the earliest expiry in 2025. The contracts are fixed price, which means there is no direct exposure to volatile commodity prices and OpEx exposure is limited by features such as cost pass through and indexation in most cases. The current contract is an exception where the OpEx element is built into the higher rates and the contract also houses relatively tight maintenance windows compared to other contracts which are currently back to the scheduled maintenance in the first quarter. This was conducted in advance of the busy summer season. It did run slightly longer than expected, partly because of the backlog from 2015, where there were delays with importing spaces and partly because of wear and tear and the extremely high utilization vessels -- high utilization rates on the vessel. Additional maintenance on the Gallant is expected to occur in the second quarter of 2016 with several additional days of hire or reduced hire. Page 10 serves as a reminder of our dropdown candidates. The Höegh Grace is on the water serving on a short term LNG carrier contracts in advance of arriving in Columbia in the second half of 2016. I am very pleased to see this carrier find work because it shows the flexibility that FSRUs have to trade in a carrier market, and in addition it provides the added advantage of testing the vessel and making sure that any parts are figured out in advance of its arrival in Columbia. [indiscernible] dropped down to the MLP, it will require equity and it won’t necessarily enable the partnership to increase the distribution by 22% in the same way that the Gallant did, but is a great opportunity to make an accretive acquisition and drive distribution growth. With [indiscernible] the quarter in more detail, page 11 provides an overview of the stable cash flows, fully covered distribution and growth that Höegh LNG Partners is delivering. The quarter was impacted by the maintenance on Gallant and the negative $1.5 billion [ph] that flows through on the charts with the exception of the distribution, but remains robust and supported by our long-term contracts. Page 12 has the income statement. The $9 million negative mark to market on the swaps of the JV level is a key contributor, and without these, the net income would be set [ph] in place, adjusted for the FX that is within the other items and the net income increases to the 8 million that we showed on the previous page. Segment reporting on page 13 shows the impacts of the Höegh Gallant maintenance and the majority held FSRUs. The segments are consistent with expectations and if you’re looking for the impact of the swaps, you can see that in the last on derivatives row of the joint venture column. Page 14 is a first quarter 2015 comparison. The majority held column is not comparable since it pre-dates the dropdown of the Gallant but you can see good stability elsewhere, notably from the JV and in the other category that is basically corporate debt [ph]. Page 15 provides a breakdown of the financial income and expense. This is at the consolidated level. So you don’t see the effects of the swaps from the JVs. Moving on to the balance sheet on page 16, and there continues to be healthy cash balance. So there is no need to draw on the 85 million revolving credit facility from HLNG in the quarter and it remains undrawn. This will be changed in the second quarter as that continues to amortize, something that you can see in the balance sheet for the consolidated level assets where $7.5 million of debt was repaid. The balance sheet is also effected by the mark to market on the swaps and on this slide, this is in the other long-term liabilities row, it is broken down in more detail in the financial statements. Turning to Page 17, this draws everything together into a distributable cash flow table that shows that we gave out distributions for the quarter despite the scheduled maintenance on Gallant. This is adjusted for, we are well within the 1.1 to 1.5 coverage window we targeted after the drop down of Gallant, a range that we believe to be keeping with our modern assets, long-term contracts and importantly the interest rate swaps that we have in place on all our facilities. Lastly, I'll summarize with the Höegh LNG Partners investment proposition. We are only pure play operator of FSRUs. Our modern fleet provides critical energy infrastructure and using both our long term fixed contracts, we have an attractive pipeline of dropdown opportunities, the fundamentals for the FSRU market was strong, as Höegh LNG is the industry leader and highly supportive sponsor. And on that note, thank you for listening and I will gladly take your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Chris Wetherbee of Citi. Please go ahead.

[Chris Wetherbee:]

Good. So a couple of questions. I wanted to start, first in terms of hire for the Gallant, just want to make sure, just technically, how many days should we be thinking about? I think you had mentioned some vacuum issues with the FSRU. So how should be thinking about that in 2Q in terms of operating days?

[Richard Tyrrell:]

At the moment, it's several days. Not sure whether it's going to end up being in Q2, Q3 [indiscernible] and with the customer, but there are few things that still need to be done and it will take several days.

[Chris Wetherbee:]

Well, that sounds like maybe a little bit less than a typical sort of 15 days off. So something less than that

[Richard Tyrrell:]

Yes.

[Chris Wetherbee:]

Okay, that's helpful. And we don't know yet if it’s 2Q or 3Q is what you're saying

[Richard Tyrrell:]

Exactly.

[Chris Wetherbee:]

Okay, that's helpful. And then in terms of the Independence and consent for dropdown, is this sort of -- are we progressing as expected? I guess I just want to make sure I understand the timing of that concerned from the customer? Should we expect that something near-term? Does this have any impact on the timing of Independence or Grace, which would be the first or preferable FSRU to dropdown potentially this year?

[Richard Tyrrell:]

Yes, I think we're very much focused on the Grace as being the next dropdown. I think we'll be a little bit capacity constrained even if the Independence consent, it does come through at the same time and for various reasons the Grace I think is a more attractive asset to the MLP.

[Chris Wetherbee:]

Okay, but is the consent -- is it taking longer than you would have anticipated or do you see any other incremental roadblocks along the way or is this sort of natural progress of getting this done from the customer?

[Richard Tyrrell:]

It's a little bit booked down in the politics of the asset and it is sort of very much a strategically important asset to the country and they are very, very sensitive about any [indiscernible], and for that reason and because we do it with Gallant, they progress sort of around the corner, we're maybe not wanting to personal on that

[Chris Wetherbee:]

Okay, that's helpful and then just coming back to a comment you mentioned before, Grace acquisition would require equity and so just from a dividend contribution perspective, it sounds like you feel like you’re saying it could be accretive to the distribution but not to the same degree as the last drop down was. Is that a fair way to read your comments?

[Richard Tyrrell:]

Exactly. And the last drop was the effect to the fund of the IPO crisis. So it was very accretive and they said it was accretive, but I don’t want to kind of give people the wrong idea of what to expect from the next one.

[Chris Wetherbee:]

Sure also with them, that make sense. And then last question, you have one -- at the parent level of one open new building hull. I just want to get a sense of sort of the prospects for the market right now? It seems like the brand’s been successful, contracting out the assets as they’ve come through the new building process. Just want to get a sense of how you’re thinking about that for that open vessel?

[Richard Tyrrell:]

Sure and the I think development seen enough at the pattern level, extremely active and let’s say it is from the projects moving faster than others which is always the case. They have a policy of not announcing until signed, but I think they are optimistic that they’ll have work for that vessel which at the moment is open before too long.

[Operator:]

Our next question is from Fotis Giannakoulis of Morgan Stanley. Please go ahead.

[Fotis Giannakoulis:]

Yes hi, Richard and thank you. This is a probably the best performing segment in the energy values chain. I'm talking about the FSRU markets. And it seems that there is lot of attention from a number of shipping companies that they are interesting in entering in to the FSRU market. Can you please comment on how do you give the potential increase in competition? We are hearing about a number of FSRU projects under development. Can you give us an overview and also how many of these projects do you expect that they will be awarded every year through the next couple of years?

[Richard Tyrrell:]

Sure. Thanks for the question. Over the next couple of years, I think our guidance is line with what it has for a while. So that is three to five projects globally. Now the barriers to entry are reasonably high in that the infrastructure needs to go in around the actual FSRU, just to tie it back to whatever end user is of the gas. There’s contract complexity, there’s tendering pipe complexity, and all those things, I think provide a fortunate barrier to entry from our point of view, but they are also have a habit of causing things to slip a little bit by way of time table. I don’t see any change there, despite the level of interest being probably as good as it has been. So your view on the competitors is that it is an attractive sector. I can quite understand why people want to get in, but it’s definitely not simply a matter of building a vessel and then especially not on the spec, and then just hoping to find work. I think people will tread a little bit more carefully than that.

[Fotis Giannakoulis:]

And can you comment also on the Octopus [ph] project, when do you expect that this project will be awarded and what has been the reason of any delay? Is it something that we should expect the next couple of months. And also we have seen number of potential power plant projects with [indiscernible] are participating in the ownership of power plants, of newly built power plants. Is this something that you might be looking at, given the potential of having in the past FSRU contract.

[Richard Tyrrell:]

Sure, well firstly on Octopus, I think we’re close enough to the projects. I do understand that there’s a bit of a slippage in time table around permitting but I’m afraid that’s a question for the parent. When it comes to other projects of that type, because obviously it’s integrated project where they are using FSRU to deliver gas to a new power plant. There are a number, number of those around the world in Latin America and Africa in particular and we are looking at those, and we’re involved in groups that are trying to pull those together at the parent level, but I wouldn’t see as going into the sort of downstream part of the value chain, necessarily we’d sense -- well I think we view our capabilities is very much in the FSRU space, and we can look to partner on the rest.

[Fotis Giannakoulis:]

Thank you, Richard. One last question, I mean, I'm trying to understand how you use the time schedule on a dropdown -- your stock is probably the best performing stock in the broader LNG, at least the maritime space and the yield has been consistently in single-digits, although still much higher than it used to be eight years ago. Can you explain to us at what point do you think that you will read the market to fund additional dropdowns and if there are any ways that the parent can facilitated with such dropdown by taking some equity or even altering the way that the IDRs are structured right now.

[Richard Tyrrell:]

Sure. I think the market is after a dropdown and I think the current yields, I think it works from a financial point of view. They will be a bit of back and forth I'm sure between the complex committee and the parents on valuation as there always is. As part of that back and forth, things like the incentive distribution rights that could came into play but it's difficult to forecast that at this stage. And for us, the Grace, as I said I think will be the next dropdown, it is on what is schedule we see in Colombia in the second half I suspect will end up getting into a negotiation on the matter towards the beginning of the second half with the expectation of dropping it down in the later part of second half of 2016.

[Fotis Giannakoulis:]

And regarding of the potential of support of dropdown through changes in the IDR, is this something that you might be considering or you will remain at the current structure?

[Richard Tyrrell:]

Well, it's definitely a component of value right, so we've never looked to any valuation without considering the [technical difficulty] and as I said they could be certainly be part of the trade. And then maybe just sort of follow up on one other point, which I think you raised in relation to what the parent could provide other ways for -- I mean for sure they could, I think you dropping down something in two parts is probably more likely than equity as part of a dropdown given that we're sort of focused on I think increasing the free flow rather than seeing it shrink but it is something that will definitely consider ship the market not to be there or should the capacity of the market not to be there to do an entire vessel.

[Fotis Giannakoulis:]

Thank you very much, Richard, that's been very helpful.

[Operator:]

The next question is from John Humphreys of Bank of America. Please go ahead.

[John Humphreys:]

Hi, Richard. Just wanted to touch on one of your earlier slides where re-gasification rates have tripled year-over-year for the group, and just wanted to ask, how far you are from sort of capacity from the overall feed, is that sort of running flat out for the ships and not -- and what that means for future charter rates given the incredible increase in re-gas rates?

[Richard Tyrrell:]

Yes, first, actually doesn’t make a difference to charter rates because we get it at higher right effectively on a daily basis, so logging benefits from the increased charter rates, sorry increased re-gas rates. But of course, nice to see that the customers are benefiting from cheaper LNG and they're starting to put more LNG through the assets. Now where are they in terms of utilization, it varies and it's a little bit seasonal in some cases but we're now at probably about two-thirds capacity on average and of course 100% pretty much on Gallant, we've been really using her for she's worth.

[John Humphreys:]

Excellent, thank you. And understanding the agreed upon charter rate isn’t going to adjust without the utilization -- would these high utilization rates be able to drive higher contract rates in the future or is that really going to driven by the supply that FSRUs in the market?

[Richard Tyrrell:]

Yes, I think it will be the latter even without [indiscernible] coming into the business, it has been a competitive business. So, I'd expect it t remain that way. And of course from a customer point of view if that’s putting more gas through the unit then the unified cost of that gas will shrink, so it might be -- if these things are operating at full capacity $0.30 per MMbtu for example and that will make it more attractive but could drive demand but whether that will result in higher prices is going to be more dependent on supply demand dynamics around FSRUs rather than the gas itself.

[John Humphreys:]

And then just the last one, you gave us good clarity around expectations for Grace negotiations being in the second half of '16, and hopefully that dropdown completing at the end of '16. For Independence is there is a timeline laid out for that in early '17 or late '17, or is it too early at this point?

[Richard Tyrrell:]

It's a little bit early to say, whether it’d be Independence or whether it’d be 2551, I’d like to think there will be another dropdown in 2017.

[Operator:]

Our next question is from Richard Diamond of Strait Lane Capital. Please go ahead.

[Richard Diamond:]

I have two questions, the first question is can you address the advantages of having newbuilds in the FSRUs space as opposed to converted LNG shifts? That’s number one. And my second question is do you know how rare it is for Höegh to be complementary on a shipping company management these days?

[Richard Tyrrell:]

Thanks for the questions Richard, I mean the first one is pertinent question. And our view is very much that if the customers have the time to wait for a newbuild -- waiting for a newbuild. And that’s because they’ll save money in the long-term and the cost saving of the conversion it will depend on the vessel but it isn’t really there and that’s our advice. However, for a newbuild, unless you're going to take one of the vessels which are available on spec and we have one of them available on spec and they want two of our competitors then for 28 months, which it should be too long for some people. And we’re looking at conversion options. And if anyone wants the vessel within 12 months we might look at doing that for them, probably switching it out in due course but [indiscernible] convert one of these vessels and it will provide much of the same functionality, if not quite be optimized in the same way as a newbuild.

[Operator:]

Our next question is from Spiro Dounis of UBS. Please go ahead.

[Spiro Dounis:]

So just want to ask, I think I asked this last quarter, just wondering if any change, so kind of a follow up. Obviously, [indiscernible] from competitors out there that are not in the FSRU space yet. But when you go to the tendering discussions and I realized you’re not as actively involved as maybe people as apparent. But are you seeing a lot of new faces in there or still far from what you can tell us still a lot of the old crew?

[Richard Tyrrell:]

We’re not seeing them as yet in the tender process, I suspect they might be sort of focusing on more the bilateral deals as first entry into the market, but we’re certainly not seeing them in the [indiscernible] now.

[Spiro Dounis:]

And then just as far as the grade goes, appreciate the color on that. Just wondering I guess that they already got debt on it, state assumption that you'd just basically inherit that and maybe just give us a sense of how much gas been cleared?

[Richard Tyrrell:]

Yes, it has got debt on it. It's being cleared at length of value of about 67%, so it's got about 200 million of debt on it at the moment.

[Spiro Dounis:]

Got it, that makes sense. And last one from me, seeing shipyard prices come down pretty significantly across the board for a lot of the other shipping segments, I imagine that that’s probably still the case too with LNG and FSRUs. Just wondering if that is consistent with what you’re seeing? And what does that mean for you in terms of being able to place an order here since the sponsor is very much incentivized and eager to place an order right now, so maybe capture some of that?

[Richard Tyrrell:]

Yes, sure. And I think the sponsor most likely to wait until they have a contract [indiscernible] before placing an order that’s what I do. The markets for newbuilds it isn’t that to keep an eye on, it is extremely competitive. The yards are not making a lot of money on these vessels as things stand, so I don’t know how much scope there is to become even more competitive still. But we have probably seen the cost of these vessels come down by 10% over the last 18 months or so. And that’s partly to do with raw material, steel and so on and so forth. But it is because the yards of shopping pencils such degree that they are really not making quite much in terms of margin.

[Operator:]

[Operator Instructions] The next question is from Andy Gupta of HITE Hedge. Please go ahead.

[Andy Gupta:]

Congratulations. We've covered a lot of topics. One thing is can you remind us of the contract terms on Grace?

[Richard Tyrrell:]

Sure, Grace is up to a 20 year contract, but it’s got a couple breaks in there and those are structuring reasons, I never say that they won't get exercise but [indiscernible] that will be in Cartagena in Colombia for the long term that are very keen to see it arrive.

[Andy Gupta:]

And remind me again, have you discussed what the EBITDA would be on that, so what should we assume sort of can also a long time would be sort of 35 million to 40 million range?

[Richard Tyrrell:]

I think for Grace it’s up towards the top end of that range, barely one where we've gone a little bit lower and this is in the excellent sheet discloser is the Chilean contract where we have the benefit of build back-to-back for that one and probably 20 years contract and that one is of 36.

[Operator:]

There are no further questions. This will 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 very much for joining the call. I sadly will miss you at the [MLT Association] conference this week because we have, [indiscernible] for Höegh LNG that that clash. But I will be in the US over the next few weeks at New York, Chicago and land back to New York again so if anyone who'd like to catch up, please don’t hesitate to give me a shout.

[Operator:]

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