Höegh LNG Partners LP
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Good morning and welcome to the Höegh LNG Partners’ Presentation of the Fourth Quarter 2016 Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today’s presentation there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Richard Tyrrell. Please go ahead.

[Richard Tyrrell:]

Thank you, Jason. And good morning, ladies and gentlemen. Welcome to the Höegh LNG Partners’ fourth quarter 2016 results call. On the cover page this quarter, I've chosen a shot of the Neptune in Turkey. Engie our customer is using its net FSRU again after using it for trading previously. It is supplying desk through pipeline you see on the bottom left of chart and demonstrating a flexibility of our FSRUs to quickly switch between multiple operation. Next as ever please take note of the forward-looking statements on page two, and the glossary on page three. Moving to page four, I'd like to summarize the results for the fourth quarter. They reflect a strong operational performance and continued robust cash flow generation from our long-term, fixed-rate contracts. Year-on-year comparison is expectedly in accordance of this quarter as it is based on the same group of assets. We did fund the Höegh Grace acquisition in the fourth quarter, but as it didn't close until the New Year, it will only contribute to the results from the first quarter of 2017. HMLP reported time charter revenues of $23.3 million for the fourth quarter of 2016, compared to $23.4 million for the fourth quarter of 2015. This consistency reflects our fixed rate contracts and minimal up higher in both quarters. We generated operating income of $33.2 million for the fourth quarter '16, compared to 22.2 million for the fourth quarter '15. Reported net income was $24.9 million for the fourth quarter '16, compared to $17.1 million for the fourth quarter '15. After excluding the non-cash effect of our long-term interest rate swaps, which again increased in value in the quarter, operating income, excluding gains on derivative was $17.1 million for the fourth quarter '16, compared to $16.8 million for the fourth quarter '15. Net income, excluding gains on derivative was $8.2 million for the fourth quarter '16, compared to $11.2 million for the same quarter in 2015. The net income level is lower for the quarter because of an inflated non-cash income tax expense of approximately $2 million. Income taxes in Indonesia and results from a new regulation related to interest deductibility that is subject to clarification, it may turn out not being payable and reimbursable to revenue under the terms of the charter that it is. Segment EBITDA which includes EBITDA from our joint venture vessels on a proportional basis has increased to $25.8 million for the fourth quarter '16 from $25.7 million for the fourth quarter of 2015. Lastly, on this page, I have highlighted the recurring cash flows excluded from segment EBITDA that we factor in distributable cash flow, namely those related to the finance lease treatment of the Lampung contract under US debt, those related to the purchase price accounting on the Gallant and getting in the other direction deferred revenue related to customer funded modifications on the Neptune. The dashboard page on five provides a graphical illustration, stability is evidence in all measures. Segment EBITDA reflects the strong operational performance. Adjusted net income is write-down by the non-cash tax, but without this or with offsetting amounts reimbursed through revenue it is in line with the same quarter of last year. The distributable cash flow is the highest, yet cheap at $13.3 million and don’t forget this, it’s yet to include any contribution from Höegh Grace. It represents 0.97 times coverage for the declared distribution for the quarter, an amount that factors in the unit issued in the December follow-on offering use to acquire Höegh Grace. On a more like-for-like basis, which is a comparison with the previous level of distribution, it gives a coverage ratio of 1.21 times, that compares to 1.18 times this time last year. We will of course have contribution from the Grace in the next quarter and in association with this management has reaffirmed its intention to recommend to the partnerships forward 4% to 5% increase in distribution. This is something that would result in new step in the distribution chart in the bottom right-hand corner of this page. Page six summarizes what is been HMLPs main event for the quarter, which is a successful follow-on offering and acquisition of the Höegh Grace. The 51% of the Höegh Grace is acquired with an effective date of January 1, 2017. The unit - multiunit is on a minimum 10 year contract in Cartagena, Colombia, whereas the backup [indiscernible] producers that are dispatched when hydrogenation runs live, for example in periods around mid year [ph]. The acquisition was funded with $112 million equity offering that upsized due to strong demand. Please note that unit count of just fewer than 33 million units of reference, this includes the 13 million units and subordinated until at least 2019 held by Höegh LNG. Once nice thing about the transaction of course, is this - are expected to allow me to recommend in increase in distribution to the board of 45% for the third quarter of 2017, another is that 49% of the Höegh Grace remains to be dropped down and HMLP has an evergreen right of first offer on this. Turning to page seven. The acquisition of the Höegh Grace is strategic in a number of ways, not only due its large and diversified the HMLP fleet in 4 to 5 FSRUs, it also – while, the associated follow-on aspects of it shows to significantly improve the liquidity of HMLP units and it is going to be an important facilitator of the future growth. So where are we today? We have the Neptune operating in Turkey as an FSRU under its subcontract with our customer Engie. You'll see later its slightly elevated revenue and cost in the JV segment for the quarter, that reflect the proprietary work for this project in the fourth quarter. Costs are passed through under this contract. The GDF Suez Cape Ann Neptune's sister unit left China in January to replace Neptune and Engie’s carrier pool. The contract rates remains unchanged under our long-term charter with Engie. The PGN FSRU Lampung continues to serve in Indonesia and the Höegh Gallant continues to serve in Egypt. The utilization on the Höegh Gallant is extremely high, as well in the fourth quarter we had limited downtime, I'm expecting the maintenance downtime to reduce operating profits by the equivalent of approximately five days of revenue in the first quarter of 2017. And last but not least, the next quarter will see the Höegh Grace added in the portfolio bringing with it additional size and diversification. I'll say a few words, on the accounting impact of the addition of Höegh Grace, a little later on. Page eight, is our familiar contract chart updated for the Höegh Grace. The key start is 12.5 years of average remaining contract length, with the earliest expiry being in 2025. So Höegh Grace with its long-term contract has maintained our best in class standing, I am pleased to say. In SPEC, the charter of the Höegh Grace added to our list of sovereign and utility counterparties in Cartagena [ph] and Colombia the gas distributor of Colombia and supported by a regulatory regime that collects a tariff from the electricity users, effectively insurance premium that covers the access to LNG. Taken together, our fixed rate contracted cash flow supports our growing long-term distributions and growth is something I am going to get back to at the end of the presentation. But before I do, let's look at the quarter in more detail. Page nine shows the income statement, the study quarter-on-quarter revenues are apparent, while the annual numbers reflects the addition of the Höegh Gallant, the fleet in the fourth quarter of 2015. The effect of the swap is appearing in two places, firstly, the equity in earnings of joint ventures and secondly, in its own line for the consolidated assets which here are PGN FSRU Lampung on the Höegh Gallant. The income statement also shows the non-cash income tax related charge to Indonesia, as mentioned the reason it has appeared is that we are waiting currently on a new role on interest deductibility, but there is a tax free investment provision under the charter that most of been should become payable. Page 10 and 11 provides an interesting quarter-on-quarter comparison, the majority held FSRUs column shows that revenues are stable, in the JVs it’s slightly elevated to reflect the reimbursement of costs related to the preparation of the Neptune to Turkey. Operating costs in the majority held FSRU segments are down because of variations in the delivery schedules of spare parts and certain consumables. Operating cost in the JVs are up to reflect the Neptune work I just mentioned. Cost in the other segment elevated by costs associated with the Höegh Grace acquisition that was announced in the quarter. The $25.8 million in segment EBITDA is the highest achieved for our quarter to date, and is something that I am particularly pleased with. The last comment I have on this table is that it’s a good place to source the necessary adjustments for our interest rate swaps. There is the 661,000 impact, but it’s consolidated in the majority held up FSRU column and $16 million impacts in the JV segment that's impact the equity earnings and joint ventures. Turning to page 12 and the financial income and expense table. It shows how interest expense is falling with the amortization of debt. It also shows some of the cash charges that reoccur, but those show up in our operating plan that we need factor into distributable cash flow. The balance sheet on page 13, again shows how the debt level is falling. The secured long-term debt on a consolidated level has fallen from $330 million to $300 million since December the 31st, 2015. The unconsolidated debt of the JV level has fallen similarly. The December 31, 2016 balance sheet reflects December follow-on offering, the finance and liquidity note in the press release provides details on how these prices were deployed, basically the excess prices in the upsizing of the follow-on are not creating any drag as they've been used to repay part of the seller's credit outstanding from Gallant which is the facility that has an 8% coupon That results can be seen in the revolving credit and credit line coming down here in the balance sheet on page 13. Page 14 that provides a backup for the distributable cash flow numbers provided previously. With page 15 providing a reconciliation of the same to the US GAAP measure net cash provided by operation activities. The first thing I'd like to point out, is the adjustment or all the adjustments to make for the purposes of an operating model, namely the cash collection/principal payment on direct financial lease, amortization in revenues for the above market contract or contract in this space that relate to the Gallant and amortization of deferred revenue in the JVs. Next, interest expense is the P&L number, the both majority held on JV assets, included in both of these is some amortization of debt issuance costs that needs to be adjusted for and this is represented by the $512,000 you see rested here. Other items are taken from the financial income and expense table presented previously, minus the unrealized FX gain. The current income tax expense is just $99,000. We had a small legacy indemnification claim from HLNG for the quarter. It is shown here and then the provision for estimated maintenance and replacement capital expenditures, as a result seen in the past. It will of course increase in the first quarter with the addition of the Höegh Grace to the numbers. So taken together, our distributable cash flow for the fourth quarter comes to $13.3 million and this represents a 0.97 points coverage based on the post-follow-on distribution level or a 1.21 times base coverage on the pre-follow on distribution level, which is more comparable given that the great is yet to contribute to the financials. As mentioned previously on page 16, I want to say a few words about how the rates will be accounted for in the first quarter because of this stage HMLP only owns 51%, it is a little bit complicated, but this complication will of course go away once the remaining 49% is acquired, assuming this happens in due course. What you'll see in the next quarter is 100% of the time charter revenues and 100% of the expenses from the Grace appearing in the individual line items of the income statement. The income statement will then reflect the non-controlling interest for the 49% of net income. Likewise, a 100% of the assets and 100% of the liabilities will be consolidated on HMLPs balance sheet with again the addition of that non-controlling interest. The segment EBITDA will stay true to its pro forma approach with a 51% contribution from the Höegh Grace being included in our reports and presentation. Turning to page 17, and moving on to the future, I've included an amount of the various projects around the world and would like to highlight the start of operations in Turkey and HLNG project awards in Pakistan and Ghana that were both announced in the fourth quarter. I should also mention, the disappointing news that Chile is going to be delayed basically for procedural reasons, the community that consultation reg that’s run by the local authorities needs to be repeated. Overall, business development activity remains strong. I wouldn't say it’s particularly focused on own region, but I know a project in Latin America, Europe, the subcontinent and in Asia. Page 18, highlights the acquisition of Höegh Grace, its being another milestone in HMLPs growth trajectory. I continue to believe that we can double in size by 2020 on the recent project awards of the HLNG level 1st of August. When it comes to timing, subject to all the usual caveat, the next 49% of the Höegh Grace is a 2017 event, most likely in the first half. Ghana or Pakistan are most likely next in 2018. So it's looking like a bit of hiatus as to Grace followed by a lot to do. Höegh LNG has now reached the size where its flexibility and it allocates vessels and because of common SPEC it is relatively straightforward to it - for it react the change in schedules and these could have take Chile delays, yet equally they could be short term opportunities for FSRU which is certainly out as we see it. Page number 19 completes the picture by setting out the charter profile for dropdown candidates, both to Ghana and Pakistan project are noticeable of being 20 years in length. It's also worth adding that the car petroleum [indiscernible] are part of the consortium in Pakistan. This is one of the key ingredients of the project that attracted us to it. To finish, and turning to page 20, let's take a look at the contract momentum for FSRUs. With 2016 now behind us we've been added to the table and as you can see the tally of awards came to six. So we're starting to see the gradual path that we've been anticipating. LNG is attractive as it’s ever been from a buyer’s perspective. The buyers need the infrastructure to make the most of it and that is where FSRUs come in. With that, I'd like to thank you for listening and I'll be more then happy to answer any questions.

[Operator:]

[Operator Instructions] The first question is from Ben Nolan of Stifel. Please go ahead.

[Ben Nolan:]

Hey. Good morning, Richard. I have a couple of questions. The first relates to just sort of how you envision the development of - the FSRU market at the moment. I mean, obviously last year was pretty busy in terms of new contract awards, but at the same time we are seeing delays in Chile and you know, your vessel in China being pulled out. Is this – and now you – or we can expect, you know, 6 to 10 incremental FSRU awards or is the dynamic changing little bit do you think?

[Richard Tyrrell:]

Sure. Hi, Ben. Thanks for the question. Yes, I think the market is growing. It's becoming more fluid and we're seeing – we still see the contracts to take a long time to come together. But we're seeing – having more opportunities that can be realized quickly, which is a reflection of the attractiveness of LNG I would say. So yes, that always be the potential for delays, as always it has been in the LNG space. There is also the potential for surprises. So what that means, net-net, well, I've always been sort of more of kind of 3 to 5 year type person in terms of the actual run rate. We obviously beat that slightly this last year and I can see that continuing, whether it will get as high as China, I think that remains to be seen.

[Ben Nolan:]

Okay. That’s helpful. And then sort of along the same lines, in the past two months there is been a number of new FSRU vessels that have been ordered without contrast, including couple from you sponsor. But did you accelerate in Maryland [ph] and others. Is – first of all, are we starting to see the prices of those new vessels fall, and I appreciate that’s something – little bit more for the sponsor level, but ultimately impacts the price that you would pay. And do you think that the dynamic is changing such that balance just becomes necessary to order these vessels without contracts, in order to potentially be in a position to compete for these contracts when they materialize?

[Richard Tyrrell:]

The first think I would say is that, yes, there is an order, and not another piece of paper. So you got to look closely at what actually has been ordered and maybe this quite as much as what you suggest. But we do think it’s important to have a vessel available to meet the lead time on these projects, which does mean order income on SPEC and of course we maintain that at the MLP level, that’s a risk which is taken up stats for the Höegh LNG group. And I do think it is something that’s going to important for competitors if they want to get into this business.

[Ben Nolan:]

Okay. And with respect to pricing any color there, as to if there is been any fall in newbuilding prices and how that might eventually filter through for you guys?

[Richard Tyrrell:]

Yeah, there has been clearly been fall, yes, its bit hard to say how long it will last, its – everything precipitate, that fall is not so much deep, sort of cost of the vessels coming down, its more the need to fill fully yards with work, and now they longer have drilling rigs to build. So there has been fall, you know, whereas maybe in the past we though of sort of oil [ph] cost being around $300 million level, its now probably more around the 260 type level and that includes the sort of financing and supervision costs, actually yard cost are less than that, less than that. That the prices have come down a little bit, everything else being equal, so returns being equal, you can expect that to be reflected in the regs. But so far, yes, competitive business is a little bit difficult to say, we've not too much into recent awards, but $36 million for a 20 year contract in our case, I think we'll say is quite reasonable when you compare it with what we normally view as being the 39, 40 for a short term tenure contract and giving a choice for two – more 20 year contract at a slightly lower rate

[Ben Nolan:]

Yes. Okay, all right. I will turn it over for someone else. Thanks for the help there.

[Richard Tyrrell:]

Thanks, Ben.

[Operator:]

The next question comes from Chris Wetherbee of Citi. Please go ahead.

[Chris Wetherbee:]

Hey, great. Thanks for shooting me in. Morning. I guess you know, what I want to get – dig into a little bit here ways on slide 18 you highlights sort of the anticipation of the development of fleet that you forward and really my question comes around sort of distribution coverage. So it looks like you might be taking a break as you noted post or this is second chance for up down which could happen later this year, when you think about that dynamic, how should we think about the distribution coverage that you may be willing to sort of liquid during the interim period. I guess my question is would you be willing to sort of deal with a lower distribution coverage, potentially pre pay from dividend perspective for some other growth in the future or will we really need to wait sort of progressing for each of one of these steps to come through?

[Richard Tyrrell:]

I mean, generally we've always thought of being of distribution increases, its being linked to dropdown, and I think that’s still you know, fundamentally it's the way we look at it. Although of course, over time the balance sheet changes somewhat that could lead opportunities back to refinance and so on, which would be another reason to increasing distributions. However, I don't think we're going to sort of fit into coverage ratio in order to increase the distributions, which I think was you know, why you're going there with us.

[Chris Wetherbee:]

Okay. All right. So we should just be sort of following the dropdown pattern, and kind of develop that way?

[Richard Tyrrell:]

Yes. It’s another kind of an event.

[Chris Wetherbee:]

Sure. How us said refinancing that makes sense. I just had one other question, and I think we've talked about this a little bit before, I know independent needs charter consent for a dropdown, its on the list, I am just –and should just be thinking about that if something would happen in the future that would sort of a bonus, but for the time being just not could to be sort of include in our – in our thought process for future fleet development of the MLP?

[Richard Tyrrell:]

I can go with that.

[Chris Wetherbee:]

Okay. That’s helpful. That’s all I have. Thanks for your time. I appreciate it.

[Richard Tyrrell:]

Thank you very much Chris.

[Operator:]

[Operator Instructions] The next question comes from John Humphreys of Bank of America Merrill Lynch. Please go ahead.

[John Humphreys:]

Hi. Good morning, Richard. I just wanted to ask you about the dropdown, the remaining 49% expected in first half '17, if you could just sort of talk about this in conjunction with the balance sheet and the recently equity raise, how you are – now that the debt levels come back down, how you're thinking about leverage going forward and you know, where you want to see the balance sheet and the capital structure as we going into '17 and '18, a little pause after Grace, kind of how you want to set yourself up for the next couple years?

[Richard Tyrrell:]

Sure. Hi, John. And thanks for asking the question. The next phase of Grace, so for the next 49%, well, it will cost the same as the previous 51% well require about $89 million of capital and then of course it comes with the secured debt staple period. So your question is, where do we get that money from? There are various options, and I think it will be question on what price they are available, I think equity will play a role if there are possibilities to put in place subordinated type facilities, at certain price which keep it away the attractiveness of that and then its even the potential to fly the level of debt at secured level which of course will be at more attracted valuation, so all is interest rate. So we're going to look at all, and select from the options and optimize things based on the price.

[John Humphreys:]

Great. Thank you very much. And then the real last being the, you mentioned and restated the lower OpEx for the Lampung and Gallant, it sound like that was related to the timing of parts delivery, so should we sort of think of this low OpEx as one-off or is this sort of a new efficiencies or new OpEx levels have been reached?

[Richard Tyrrell:]

I'd look at it more as the former, but yeah, I would add that there was quite a significant increase at the other level that reflected the OpEx - sorry the dropdown related costs. So [indiscernible] legal cost in relation to that and so on, which went a long way to sort of offset the benefits that we saw on the Gallant and Lampung side. So going forward, the net effect will be similar to what you see today.

[John Humphreys:]

Great. Thank you very much. That’s it from me.

[Richard Tyrrell:]

Thank you, John.

[Operator:]

There are no other questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Richard Tyrrell for closing remarks.

[Richard Tyrrell:]

Thank you, everybody for joining the call this morning. I will be at Morgan Stanley and then Barclays Capital conference this week in New York. So I look forward to seeing people at those events. If anyone has any follow up, please free to get in touch [indiscernible] for our results. So good luck to everybody with getting attributable.

[Operator:]

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