Höegh LNG Partners LP
Q2 2016 Earnings Call Transcript

Published: 25 Aug 2016

[Operator:]

Hello, and welcome to the Höegh LNG Partners LP Second Quarter 2016 Results. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Richard Tyrrell. Please go ahead sir.

[Richard Tyrrell:]

Thank you, Keith. Ladies and gentlemen, good morning, and thank you for the impressive turnout given the timing of the call. And welcome to the Höegh LNG Partners' second quarter 2016 results. Please take note of the forward-looking statements on Page 2 and the definitions on Page 3. The agenda for the call is the second quarter financial results. While you will see the strong cash flow performance that reflects the fixed fee nature of our long-term contracts, and in this quarter, the contractual protections that we have in place to cover the unplanned maintenance needs that was identified in the first quarter. HMLP reported time charter revenues of $22.8 million for the second quarter of 2016, compared to $11.1 million for the second quarter of 2015, reflecting the drop down of the Höegh Gallant. We generated operating income of $11.3 million for the second quarter of 2016, compared to $18.6 million in the second quarter of 2015. Reported net income was $4.1 million for the second quarter compared to $16.4 million for the second quarter of '15. As has often been the case in this rate environment, the reported net income was impacted by the losses of the long-term hedges that are in place on our debt. Excluding unrealized losses on derivative instruments, net income was $7.9 million for the second quarter of 2016, up from $6.6 million in the second quarter of '15. These reported numbers exclude an additional $1.7 million of cash flow during the quarter from HLNG indemnities and warranties relating to a couple of things. One, our non-budgeted warranty expenses and losses on the Höegh Gallant which relatively [ph] making this requirement that was identified during the scheduled maintenance in the first quarter. And two, those legacy construction contract expense that relates to the mooring under Lampung. The mooring is something that sold PGN before HMLP came into existence but for the guarantee claim that flow is through the local entity that sits within our structure. So while teething problems have created a few operational headaches because the FSRU and HMLP has contractual protections in place, cash flow is unaffected and distributable cash flow for the second quarter 2016 came in at $12.7 million. This compares for the distribution of $11 million and represents a coverage ratio of 1.15 times which is in line with the target. Page 5 provides a reminder of our terminals. As LNG production and liquefaction continue to expand at a rapid pace, we are confident that our FSRUs will remain the preferred method of connecting new markets to global LNG trade. I plan to come back to our dropdown pipeline later but as it consists of state-of-the-art, purpose-built FSRUs, just like those you see, we are well positioned to continue benefitting from these long-term trends. Page 6 is a slide you've seen before, it sets out the contracts on our fleet. Despite the clocks ticking by, the average remaining contract length is still under [ph] 13.6 years. We have no direct exposure to volatile commodity prices and limited OpEx exposure. As this quarter shows, some of the areas where we are exposed have warranty protection. Page 7 sets out the dropdown pipeline. As the thick red box implies, the Höegh Grace is the focus for the next dropdown. Höegh LNG has disclosed that the FSRU will be on-site mid-October with an aim to complete commissioning in the fourth quarter of this year. And this means that HMLPs aim of announcing a dropdown this year is realistic subject to market and negotiation. Slide number 8 gets back to the quarter, it shows how key measures are developing. The box in the top right to us indicates how the quarter was affected by the non-budgeted costs that have been subject to indemnity and warranty claims. Adding those back provides sense of the unaffected run rates, some of those at about $1.4 million as indicated impacted the adjusted EBITDA and the full amount of $1.7 million includes non-operational items that you see gross impact on net income. The indemnity and warranty claims flowed in through equity and as such are reflected in the distributable cash flow chart where you see the $12.7 million result and the pleasing 1.15 times coverage. Page 9 takes a look at the income statement in more detail. The year-on-year comparison reflects the addition of the Gallant partnership. Moving down you can see the impact of the $315,000 construction contract expense related to the mooring for which the indemnity payment has been received. The sharp increase in D&A reflects the addition of the Gallant and the virtual lack of D&A previously; it was down till the financing lease accounting that's applied to the Lampung because of the length of this contract. And the volatility introduced by the mark-to-market on the long-term swaps of the JV level is also very clear to see in the equity earnings of joint ventures line. Page 10 is our segment reporting that provides the usual breakdown. It includes the detail leaders to lessen out the impact of the swaps and there is also a reconciliation table that is the same in the appendix. The majority held FSRUs are boosted by the Gallant while there is a high degree of stability in the JV and other columns as one would expect. Income tax is relatively high but is worth pointing out that the bulk of this is non-cash and -- is non-cash because of start of related losses carried forward in Indonesia and revenue on Lampung will go up to reflect the pass-through nature of taxes under the Lampung contract once cash tax becomes payable. The comparison with the same quarter in 2015 is provided on Slide 11. And then 12 include additional detail on the financial items and P&L. Again, the difference with 2015 primarily reflects the introduction of the Gallant to the mix and you can see the interest payments on the inherited debt increasing accordingly. Page 13 is the balance sheet slide. Like the P&L it's impacted by non-cash mark-to-market after swaps but here flows into the other long-term liabilities lined. The impacts of this is $51 million as of June 31, just sharing how far interest rate expectations have moved since those long-term swaps were put in place. The other point which I'd like to highlight on this page is the amortization of the debt which on a consolidated level shows that $15 million has been repaid since the end of last year. And looking further back, Page 14 shows that more than $69 million have been repaid since the third quarter of 2014 which is the first quarter after the IPO of HMLP. The rate of deleveraging will start to come down now that we're drawing on the revolving credit facility which is something we did in August this year for the first time but HLNG will continue HMLP will continue to see a filling up of debt capacity overtime. This filling up of debt capacity is not going to be sufficient to fully fund the dropdown but the FSRU in relation to debt is opening up the possibility of an element of debt financing in future dropdowns and this is something which I will be factoring in when reviewing the Grace opportunity. Page 15 is the last of the tables in the main body of the presentation. It shows how we arrive at the $12.7 million in distributable cash flow. The complicating elements that we've talked about previously such as the financing lease, the amortization of market, Gallant contracts, and equity earnings in JVs are consistent with prior quarters. The most notable element in this quarter is the $1.7 million cash from the indemnification and with this I'm pleased with the $12.7 million result, it compares favorably without distribution of $11 million by representing a coverage of 1.15 times. There are a number of reconciliations in comparison tables in the back of this presentation and there is considerably more information in the full financial results that was filed this morning. If you have any questions on these, don't hesitate to get in touch once you got chance to review them. And I'll wrap up this quarters presentation with a reminder of Höegh LNG Partners investment proposition which I believe is strong and deliverable, the key elements that we're the only pure play owner and operator of FSRUs which is a attractive sector right now given the industry dynamics. The [ph] is modern, it's a element of particular infrastructure which means that it is something that is line for the long-term contracts and sticking on-site. For the long-term we've got full employment in our vessels, they are on fixed long-term contracts which have an average life of 13.6 years and an element of OpEx pass-through which further reduces volatility. The dropdown pipeline is reasonably strong and I hoping [ph] back to see it improve still further given the business development efforts with the parallel level as I've recently announced an initiative to order long lead time items on a conversion projects which I think reflects that confidence in the market which is something where we see momentum definitely building. And with that, I would like to hand it over to questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Chris Wetherbee with Citigroup.

[Chris Wetherbee:]

Great, good morning Richard. How are you?

[Richard Tyrrell:]

Good, thanks.

[Chris Wetherbee:]

I wanted to ask about the independence first actually, just wanted to get a sense of maybe when you thought the agreement with the charter party might be reached to sort of open the door for the potential job. I know Grace is kind of the shorter term focus, no question about that but just trying to get a sense maybe kind of think about that and when we might expect that to develop for the rest or end of any potential risk to that ultimately happening. I'm just trying to get a sense of sort of what's going on there with you and how long it might take to kind of clear that up?

[Richard Tyrrell:]

Sure. It's quite difficult to say how long it will take and there is certainly some risk to it eventually happening. They have been reported and we know from our interaction with them that they view this as being such a strategically important project for the country that they would like to own it in the longer term and they do have an option to buy it after year ten [ph]. And they've also been reported as seeking leave funds to help support that eventual purchase. So there is a lot of things going on there on the customer side that I'm trying to sort of figure out what they can do longer term which you're going to play into any discussion and until they figure that out, it isn't likely to move forward from the dropdown point of view.

[Chris Wetherbee:]

Okay. So it's a little harder time for to put a date on it whether it's in 2017 or not. Is it something that's going to challenge [ph] to kind of get your arms around it in such timings typically?

[Richard Tyrrell:]

It's little bit difficult and obviously as the longer it takes, the less seasonal contract as well. So it becomes less traffic [ph], the longer it takes, I mean it wasn't something could be done with the contract to change that than might expect it with obviously move accordingly.

[Chris Wetherbee:]

Okay, that's helpful. I appreciate the color there. And then when you think about the Grace, do you think that it's likely second half dropdowns, I guess at this point we're probably talking about -- we're definitely talking about 4Q, did this happen in 2016 or what do you think about in terms of the timing of the dropdown or decrease?

[Richard Tyrrell:]

I've said it's likely to happen in 2016 and I think as of now it looks like it's mostly possible. The asset is going to be on higher from mid-October. The commissioning will take some time but we've done dropdowns, we did the IPO a year before the commissioning was necessary completed and we've protected the MOP from any hiccups associated with commissioning through the various warranties that we have in place. So it's definitely doable from -- into where the asset is in its process. From a market point of view, I think that at current price levels, the transaction is very doable, it will need a certainly amount of equity in order to balance it as of implied in presentation. Right now with the capacity for a small amount of debt to service a top up and if the market is there towards the end of this year, assuming we've been able to get through the negotiation with the fare [ph], I see no reason why the dropdown wouldn't be announced.

[Chris Wetherbee:]

Okay. And when you see your capital, I mean could you give us some parameters of what you might think of it roughly in-line with what you are describing as the portion of the amortization currently already on the debt or how do we think about sort of the debt piece of that findings?

[Richard Tyrrell:]

Well, the actual asset will come with a certain debt which is similar to the debt we've got on the other vessels. So I guess just ship to the Gallant, so if you want to look at a benchmark, I'd look at that transaction. What I'm more referring to on that capacity is that because we've been amortizing the debt on the other assets within the fleet, there is scope to top up slightly the debt on that -- on those assets and use that to help fund the Grace project.

[Chris Wetherbee:]

Okay, got you. And just my last question, just in terms of the Gallant, the -- off higher days that you give us a visit already but that is bleed over here to just reach you. Just want to get a sense of sort of how we should be thinking about that in 3Q in terms of any other incremental sort of offer that we should be thinking about?

[Richard Tyrrell:]

Well, the measures have been done to the extent that a fix has been put in place to a problem that was identified. There is a potential for some other work to be required and that will take place as and when the pieces that needs replacing very effectively and exactly when that will be is slightly unknown. So in the accounts we'll see a slight impact in Q3 but again, because of the nature of the issue it will be subject to the warranty.

[Chris Wetherbee:]

Okay, perfect. Richard, thanks very much for the time. I appreciate it.

[Richard Tyrrell:]

Thanks for the questions, Chris.

[Operator:]

Thank you. And the next question comes from Spiro Dounis with UBS Securities.

[Spiro Dounis:]

Hey Richard, thanks for taking the question. Just wanted to start off I guess and the announcement the other day from the GP that conversion that I guess are now in the table and so I just want to -- could you walk us through some of the benefits that you see the MLP as a result of the GP gets now growing by conversion rather interplay [ph] new bills and also just walk us through maybe what drove that decision?

[Richard Tyrrell:]

Sure. Thanks for the question Spiro. The -- few things on that, and I think firstly, the announcement shows a level of confidence in the markets and they actually at parallel level, have the visibility on how momentum is building. So that's a good thing. I think it's something which we expected given the fundamentals of -- about LNG and all the sort of cost competitiveness and so on. So that's point number one. Secondly, why conversion is part of the mix; well at conversion if you have the long lead time items, all that can be delivered in approximately 12 months compared to 28 months for a new bill. So that's the main reason for conversions, it gives you a lot of flexibility and while not every project needs a vessel that quickly there are some out there that do and it allows us to react accordingly. The downside of conversions are something that people often ask about and I think if you convert a relatively new LNG carrier that's limited at least in our assessment, they can't operate quite as River Water [ph] necessarily because the tanks aren't reinforced but they are large enough to fit within the value chains which is a prime consideration when FSRU and they've got the right power units in that -- the newer carriers are powered by engines as opposed to travel lines which means you can turn them on and off, and at least for FSRU use, they are available [ph].

[Spiro Dounis:]

Okay. So one thing about differentiators is between you and other people that are converting it, it sounds like most others are converting all their LNG carriers maybe at the end of their line for approaching MOA. If you're saying you're taking newer ones and converting -- likely converting those, I guess once you get a project lined up. Is that right?

[Richard Tyrrell:]

Yes, that's correct.

[Spiro Dounis:]

Got it, that makes sense. And then just wanted to make sure I understand the right or you're right as it relates to the independence, it was right to purchase the independence I guess within 24 months after the vessel is accepted by the charter which I guess puts it at December 5, 2016. I guess, first, is that correct? And what happens when that rate expires doesn't really change anything?

[Richard Tyrrell:]

Whether rights been extended is a matter of fact.

[Spiro Dounis:]

I'm sorry, I missed that, I apologize.

[Richard Tyrrell:]

It's -- I mean, the constraint is the consent of flapping this after.

[Spiro Dounis:]

I see, okay. And then just last one for me last quarter, finally you're getting very close to chartering Höegh 2552. Is that process any closer to completion and can the GP differ delivery if that vessel is chartered in the next few months?

[Richard Tyrrell:]

Well, it's -- the business development activity is there. I don't think the department had a call this morning where they spoke to us. I'm still hopeful that it will be on contract next year and under that we're eligible to be dropdown.

[Spiro Dounis:]

Got it, appreciate it. Thanks Richard.

[Richard Tyrrell:]

Thanks.

[Operator:]

Thank you. And the next question comes from John Humphrey of Bank of America Merrill Lynch.

[John Humphrey:]

Hi, Richard. How are you?

[Richard Tyrrell:]

Very well, thanks John. How are you?

[John Humphrey:]

Good, thanks. I just wanted to ask question on liquidity, in the release it had mentioned that the access to this facility in the second half of the year might be something that you'd have to do to handle working capital issues with current liabilities blow current assets. With Gallant potentially being off higher for more days in 3Q, could you just sort of talk about sort of the liquidity and sort of what you expect there? What you might have to tap into as far as the sponsor's kind of facility?

[Richard Tyrrell:]

Sure. The balance being off high won't have any impact on it because of the warranties but what you're pointing to is the reason for the revolving credit facility in the first place and that is to purge the difference between the rate at which our debts amortizes, which as you saw in today's presentation is reasonably aggressive, it's between 12 and 15 years depending on the facility. And the rate at which we set aside replacement CapEx and the replacement CapEx assumptions that more based on the life of the asset which is upto 35 years as opposed to the amortization on the bank debt that's currently in place. And the revolving credit facility addresses that and the strategy is to -- as the drill on revolving credit facility builds to a position where it's a meaningful enough number to refinance externally then we do that. So HLNG could be approaching that time period.

[John Humphrey:]

Great, thank you, that's helpful. And then just a question on the vessels and you're going to tell [ph] little bit before; Neptune operating as an LNG carrier, does that affect its ability to switch back in operation FSRU there? Is there any sort of loss time there if an FSRU stops operating that way and it's basically acting as a carrier?

[Richard Tyrrell:]

There is no loss time in most circumstances. The issue is it's a carrier right now, I guess, not much for that vessel because it's on a long-term contract to LNG but -- for one of our other FSRUs when they eventually come off contract, it will how much they can make as a carrier in between FSRU projects, that will depend on the LNG carrier market at that time. So we're impacting that way. FSRUs are fairly generic, so it's -- there is a new project which comes along somewhere else. Yes, there could be need for some minor modifications to accommodate the particular type of mooring set up, so mode against G&C [ph] or some kind of power for example. But those are the kind of the things which take a couple of days in the yard to fix rather than anything more.

[John Humphrey:]

Got it, thank you very much. And then just a last few, it sounds like even in last -- in 1Q on the financing for the Grace, is there anything sort of changed there as far as what we expect and how to finance that vessel?

[Richard Tyrrell:]

No. The vessel is quite a full-sized FSRU, it's on a good contract, it will grow HMLP significantly. Because of its size it will require equity financing and various sort of strategic reasons such as efficient liquidity in-store. I'm keen to do a follow-on in order to run that vessel. So I don't think other things changed the one thing which I just asked, however is that we do have bit of flexibility to include some debt in the mix and that will be nice flexibility to have given who knows what the capacity of the market might be when we go out.

[John Humphrey:]

And I'm just -- if you keep me reminding, I mean the amount of the size of the follow-on, have you sort of determined what we expect there?

[Richard Tyrrell:]

Well, it's actually subject to negotiation and the -- what the contracts committee think. But if you take the Grace as a benchmark, that will be a good starting point and Grace was $370 million deal. [Cross Talks] And the debt on that let's say, while it has about $190 million of bank debt than we have the sellers credits there. So the seller's credit was $47 million. If you look at a similar sort of structure to what we had in place there, you have got a good sense for much equity is required for a full dropdown. I mean of course we have the other question in here, whether we do a full dropdown or not, in light, the market conditions might decline as we do it in two halves, one half at a time.

[John Humphrey:]

Got it, great. That's enough for me. Thank you very much Richard.

[Richard Tyrrell:]

Thanks, John.

[Operator:]

Thank you. [Operator Instructions] As there are no more questions at present, I would like to turn the call to Mr. Tyrrell for any closing comments.

[Richard Tyrrell:]

Sure, thanks Keith. And thank you to everybody for joining today's call. I hope you've had all or about to have a good summer. And I look forward to speaking next time.

[Operator:]

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