Höegh LNG Partners LP
Q1 2020 Earnings Call Transcript

Published: 28 May 2020

[Operator:]

Good morning everyone and welcome to the Höegh LNG Partners Q1 2020 Conference Call. [Operator Instructions]. Please note, this event is being recorded. At this time, I would like to turn the conference over to Steffen Føreid, CEO and CFO. Sir, please go ahead.

[Steffen Føreid:]

Thank you, Jamey. Good morning, ladies and gentlemen, and welcome to Höegh LNG Partners Earnings Call for the first quarter 2020. For your convenience, this webcast and presentation are available on our website. Before we start, please take note of the forward-looking statements on Page 2 and a glossary on Page 3. Turning to Page 4 and the highlights. I would like to start with some comments relating to the COVID-19 situation. As of today, the partnership and Höegh LNG Group are experiencing limiting impact from the COVID-19 pandemic. The Group has taken steps to mitigate risks from the pandemic to ensure the health and safety of our crews and staff, which is our highest priority. We are continuously monitoring the situation and are as prepared as possible to address any changes to the situation that might impact us. As of today, the Group has experienced no known cases of COVID-19 infection among any of our crews or staff. The only direct effect on its operation has been delays in crew changes, which had limited financial impact. However, the situation is improving and the Group has been able to conduct crew changes on several of its vessels in recent weeks, including one of the vessels for the partnership. Additional crew changes are being prepared for the week ahead. The technical availability of the Group speed has not been affected by the current pandemic. All charter parties remain in full force and revenues are being collected, in accordance with the contractual term. Now to go into the financial and thanks to the hard work of our crew and staff. I’m happy to report that, all units in the partnership speed had 100% availability in the quarter. This resulted in total revenues of 36.7 million, segment EBITDA of 36.1 million and a coverage ratio of 1.2 times in the quarter. The partnership distributed $0.44 cents to common unit for the quarter. Furthermore, during the quarter, the partnership exercised the option to charter the balance of Höegh LNG, the subsequent charter has - in time with a five year term expiring on July 31, 2025. The charter rate is 90% of the previous charter rate for the year. Turning to Page 5. We have put in more numbers to the quarter, which shows the stable underlying operating performance, compared to the same quarter last year. Excluding unrealized losses on derivative instruments and foreign exchange, segment EBITDA was 36.1 million for both the first quarter of 2020 and 2019. Limited partners interest in adjusted net income was 13.6 billion in the quarter up slightly from the first quarter of 2019. The improvement is mainly due to one more talented day in the quarter due to the leap year, lower operating expenses and lower taxes, partly offset by higher net financial expense. I'm happy to report despite the COVID-19 pandemic the partnership delivered strong operating performance and a strong distribution coverage from our long-term contracts in the quarter. Turning to Page 6. We are showing this development of key measures overtime. As you can see from these graphs it consistency stands out underpinning the distribution made for the quarter, and with execution of the primary option relating to Höegh LNG, we have further ensured the long-term stability of the partnership cash flow and with approximately 9.2 years of average remaining duration of our contract portfolio. The partnership is well positioned to continue providing predictable distribution. Turning to Page 7, we are showing the income statement in more detail. For the revenues the quarter is up from the same period last year, mainly due to the extra trading day in the quarter. Vessel operating expenses of 5.5 million in the quarter is down from the same period last year, mainly due to lower use of fair products and external services in the quarter. Equity in losses of joint ventures of 10 million in the quarter compared to equity in earnings of 300,000 in the same quarter last year, excluding unrealized losses on derivative instruments in equity in earnings of joint ventures would have been 1.7 million in the quarter compared to 2.9 billion for the same quarter last year. The decrease primarily relate to higher charter project costs in the quarter, the majority of which are expected to qualify for a reimbursement from the charter in future period. Total financial expense of 6.9 million in the quarter is up from the same quarter last year, mainly due to a gain in - in the first quarter last year. Interest expenses were down in the quarter compared to the same quarter last year. Taxes was 900,000 in the quarter, which is down to the same quarter last year, mainly due to a reduction of factories in Indonesia. Turning to Page 8. The balance sheet has not changed much since year-end 2019, the total liabilities and equity standing at just below one billion at the end of the quarter. One thing worth mentioning is that in addition to the cash on the balance sheet, the partnership had approximately 95 million in undrawn amounts under the two revolving credit facilities, taking total liquidity to approximately 123 million at the end of the quarter. Turning to Page 9, we have shown the partnership assets all of which operated according to contract during the quarter as already mentioned. In regards to Höegh Gallant the subsequent charter is now enforced, as mentioned with a term running through July 31, 2025. The charter rate is 90% of the previous charter - certain adjustments were avoided for incremental stock. As previously announced by Höegh LNG, our parent has secured an interim contract for Höegh Gallant in LNG carrier mode for a period of around seven months from mid-2020. In addition, the unit is considered for several of the potential long-term FSRU project that Höegh Gallant is working on, which I will come back to later in the presentation. In regards to Neptune and Cape Ann and the boiler plant, the settlement agreement has now been signed and the first installment has been made with the remaining will be paid later this year. Indemnification payment from Höegh Gallant relating to the first testament installment has been made. Turning to page 10. We are showing the overview of the business activity at Höegh LNG level and I'm happy to report that this line is becoming increasingly busy. During the quarter Höegh LNG was selected as the preferred beta for two and shortages for one additional FSRU project. The box to the left shows the projects where Höegh LNG has the preferred bidder dates. We have previously announced two project in Australia, but now there are two additional projects on the list both located in Latin America, with the schedule starting in 2021 to 2023 timeframe. In terms of progress for the Australian project, AIE has now received approval for its application to modify existing development consent for Port Kembla terminal and for AGL project in Crib Point, the environmental permit process is ongoing and expected to be completed by the end of the year. The box in the middle is showing ongoing tenders, and for one of them where Höegh LNG has been shortlisted during the quarter, also this is located in Latin America. Finally, the bottom right is showing bilateral projects or projects that Höegh LNG is developing itself. This includes a project on the European side of the Atlantic patient being developed by Höegh LNG, one potential project in pipe. This business development type shows that activity in the FSRU market is high. The way we see it is proven by the low price of LNG. This is triggering Höegh LNG to move ahead with their plans to facilitate important of natural gas and these high activity is ongoing despite the COVID-19 pandemic. Turning to Page 11 and the LNG market. The first quarter of 2020 the LNG market grew by 13%. Europe continues to be the main driver of growth. However, demand from Asia also remained strong where India and South Korea were the main growth markets in the quarter. If you take India as an example, the import continues to increase, driven not only by the low price of LNG, but also by the countries need for a continued fuel switching to deal with the situation. Climate was fairly impacted by the COVID-19 pandemic in the first quarter. However, it is now showing signs of pulling back and increasing LNG import. Turning to Page 12. We have graph illustrating the expected development in the global LNG market. If you look at the graph to the left, this shows the forecasted LNG demand, both prior to and after the COVID-19 pandemic. And as you can see, demand growth is expected to continue despite the pandemic, but be less this year than estimated previously, before picking up again in 2021 afterwards which is expected to be aligned with the prior quarter. Total demand is expected to be only marginally lower in the years ahead and reach approximately 430 million tons in 2024. The graph to the right shows where the reduce demand growth is expected to result in reduced supply growth and as you can see from this graph, U.S. export is the most of it and why is that, what is the because most of U.S. export agreements are flexible, allowing buyers to reduce the off-pay. U.S. exports are not tied to a particular gas reservoir source from the whole free market that Egypt and U.S. export is made adjustment that is not the case elsewhere in the world, which is why we expected to see this increase. Turning to Page 14, and the competitive situation, this picture looks more or less as percentage over the last couple of years. We have not added any new billing orders since the previous quarter even though there has been reports of a new billing over by MRL. However, we understand that this is conditional and have therefore not included it into this. We have included two conversion units in the captive market, one relating to a project in El Salvador and one for a project in for Africa. However for Höegh LNG this means that the competitive situation has not changed from the previous quarter in the mark with where we are. And with that I would like to turn to Page 14, and the summary and open up for questions from the audience.

[Operator:]

[Operator instructions] Our first question today comes from Ben Nolan from Stifel. Please go ahead with your question.

[Benjamin Nolan:]

Great thank you and good morning, good afternoon. I had a few questions, but the first relate to the commentary in the earnings release about the possibility or the need to refinance the lampoon next year, just making sure that was more that the commentary and there was more of just an abundance of caution rather than some unforeseen challenge with respect to the need to refinance so corrected it should be relatively to recommend yet?

[Steffen Føreid:]

Hi Ben. Yes, that has a long-term financing involving ETA from South Korea and a commercial trench on top of that and the commercial trenches is maturing next year. It is about $15 million or so. And, it has always been part of the plan to refinance that in 2021. But the facility as such, including the ETA tranche is not up for the refinancing. It is the commercial tranche of the facility.

[Benjamin Nolan:]

Okay. And, you wouldn't foresee any concern or wouldn't have any concern over the ability or - is that correct?

[Steffen Føreid:]

No. I don't. This is a vessel with a long-term contract with a strong counterparty that has performed. So this is a good contract coverage for that the vessel. So, I see no problem with that.

[Benjamin Nolan:]

Okay, perfect. And then another thing I was going to ask that, we have heard a little bit in this whole COVID environment and given the challenges of crew changes and so forth, there may be a little creep in the operating expenses as crews might be, existing crews that have overstayed their contracts might have to be paid a little bit more. Is that something that you might would expect in the second quarter, maybe the third quarter?

[Steffen Føreid:]

Yes. We haven't really, that is a risk, we haven't really seen that so far. But, that is a risk or you could have overlapping crews sitting. So far that has not really been a problem. And so, I wouldn't see that as the material risk, but potentially there could eat some minor cost.

[Benjamin Nolan:]

Okay. Perfect. And then lastly, just from a macro perspective, in the latter slides there, you kind of walked through the project and also competitive landscape and obviously there has been a few project awards for conversion vessels, although for you guys, you have the purpose built vessels that where you are, I guess the stocking horse in several Latin American project. Has there been any change or switch at all and the cadence between the desire to maybe use a converted vessel maybe a little bit cheaper, lower in converted vessel versus something that is purpose built with high throughput and capacity, anything you have noticed there?

[Steffen Føreid:]

No. I wouldn't say, I think there's room for both. I think what we see as I said that, actually the activity in the business development side is high and we see that there is the more and more project moving forward. And that is project both for new bid and conversions. So I wouldn't say that, there has been a shift in preference, but it is a market where there is room for the both type of FSI use which we have steep.

[Benjamin Nolan:]

Perfect. Alright, great. I will turn it over. Thank you.

[Operator:]

Our next question comes from Chris Wetherbee from Citi. Please go ahead with your question.

[Christian Wetherbee:]

Hey, great. Thanks for taking the question. Maybe a conceptual one here to a degree. So a lots of interesting activity that you highlight on the Slide 10. If we were to see some incremental uptake activity at the parent level, what would it take for maybe the resumption of dropdown activity into your vehicle, what are sort of the circumstances that you would need to do see to do that or is it something that could happen if you get a long-term contract with the parent it could happen through, is there financing available, I guess I want to make sure I understood sort of the moving parts around kind of getting back into that type of direction for the company?

[Steffen Føreid:]

So, the parents has assets that is available for lockdown and they just need to secure the long-term employment of them. And this slide shows that there is productivity in serving and securing the long-term employment so that is good and so that is kind of one trigger of growth. But another and another element we need to see is then the financing of such growth. Now if you look at the timing I most project we are working on they have or the parent is working on has a start-up from 2021 through 2023. So, I would say that the timing of when we could expect to see a drop down coming our way would be 2022. And I think we will have to wait and considering the financing option at that point in time, we will have to see how the equity market is both for the common and preferred and we will also see how much we have deleveraged by then because we are deleveraging the partnership and if the equity markets should not be available, then potentially there could be a group for the leveraging off, but that is an assessment we will have to make at that point in time. But then the second point is for the parent to secure the long-term employment of its assets so that it has something to offer.

[Christian Wetherbee:]

Okay, and then financing would be the secondary component that that is helpful. On the topic of deleveraging, can you give us a sense that maybe what you feel like you can accomplish through 2020 and then maybe if we are talking about potentially a 2022 timeline and the question that we just talked about, what would be the potential opportunity to deleverage over the course of the next two years, so mid 2020 and 2021.

[Steffen Føreid:]

So, I think it will be along the same lines as we have done previously, we have now secured the long-term stability of cash flow from all our assets including Höegh LNG. So, we will allocate the cash flow to debt repayment and dividend distributions and we have in the past seen a steady deleveraging and we expect that trend to be continuing through 2020 and 2021. When we then do a drop down, we should expect to see leveraging precisely because on a debt-to-EBITDA basis, the debt that follows with the asset when it is being dropped down from the plant is probably going to be higher. Then that mount as it has been the case in previous drop down but probably lower EBITDA follows that business. So, it is increasingly the leverage in terms of - upon the drop down.

[Christian Wetherbee:]

Okay, but just assuming that the all the contracts perform as expected, how much cash flow above the distribution do you think you generate in 2020?

[Steffen Føreid:]

So, it is not going to change from what we have seen in the past. It is going to be the same free cash flow that we can use for deleveraging purpose as we see on that, when I bought the like this quarter and we have seen in past. So, it won't be any changes to that compared to what have seen in the past.

[Christian Wetherbee:]

Okay. That is very helpful. Thanks very much for the time. I appreciate it.

[Operator:]

Our next question comes from Ken Hoexter from Bank of America Merrill Lynch. Please go ahead with your question.

[Ken Hoexter:]

Hey, Steffen. I think, good morning, good afternoon. Maybe just a wrap up on the prior one. I think Chris was just looking, can you give just a kind of, I don't know debt to EBITDA level or what that reduction in the freak? I know you keep saying it is going to be the same, but just maybe an absolute number of what you are looking in terms of debt reduction in the year ahead.

[Operator:]

And ladies and gentlemen, the speaker line has dropped. Please remain patient while we attempt to reconnect. Mr. Føreid, you can continue with the conference. We have Ken in the question queue.

[Steffen Føreid:]

Yes. Thank you. I'm sorry for dropping out here, something technically happened. Back to the question of de-leverage. We have, at the moment the partnership has an debt-to-EBITDA on a proportionate basis of around 4.2 times. And I think we could expect to see a de-leveraging of around 0.5 times on an annual basis based on the cash flow that we are generating around that.

[Ken Hoexter:]

That is very helpful. That is great. I feel I’m on line, you can hear me right, Steffen?

[Steffen Føreid:]

Yes, I can.

[Ken Hoexter:]

Okay. Wonderful. So, thanks for that. So, just on the Gallant, I guess now I just want to understand what some of the new projects that you are talking about with Höegh there. Is there any incentive for them to permanently place the Gallant in those projects? Or they be looking solely at new builder conversion for those projects or could you look for a extension on the tie up of the Gallant aside from just putting it to the parent?

[Steffen Føreid:]

The parent has incentivized to make sure that the partnership has long-term stability and cash flows. And, the offering Höegh Gallant on this type of project where that unit is best suited compared to - is available and well suited. So, when the plant then secures long-term employment through a third-party for Höegh Gallant, the plant will benefit from that through getting off the hook themselves and also through stabilizing or securing the long-term cash flow for the partnership. So, I think they are issuing both as derivatives and securing assets or employment for new asset and for Höegh Gallant in parallel.

[Ken Hoexter:]

And then I guess maybe just a follow up on that right in the release, you talked about the outlook mentioned 90% of the rate payable subject to adjustments for avoided or incremental costs, which can reduce revenues. Is there anything you can quantify there or is that just outside of the realm, then it covers but you're still - I just want to understand what the exposure is by that kind of status?

[Steffen Føreid:]

No, it is the formula is that when we then enter into new long term FSRU contract to the extent that the sum of operating expenses and taxes relating to such contracts exceed 22,000 per day that will result in an increase in the day rate that the parent is paying. During the period of time when the unit is operating in carrier mode, it will save taxes that you previously had in Egypt equivalent to approximately 4,000 per day and that will then reduce to higher for 4,000 during the period of time when the vessel is operating in carrier mode. So, that is the limit and 4,000 per carrier mode and then actually, as long as total cost exceeds 22,000 in FSRU mode, it will lead to an increase in the day rate.

[Ken Hoexter:]

And just to confirm there you said that the parent is incentivized for long-term stability, nothing other than just the stability of the of HMLP is there other incentivization that they have in guaranteeing your stability other than the dividends they receive and the continuation of that?

[Steffen Føreid:]

No, they have the dividend and the stability of the partnerships cash flow that is their incentive for securing the employment.

[Ken Hoexter:]

Okay. thanks Steffen, great. I appreciate it. Congrats on the stability and good luck. Thank you.

[Steffen Føreid:]

Thank you.

[Operator:]

Our next question comes from Liam Burke from B. Riley FBR. Please go ahead with your question.

[Liam Burke:]

Thank you, good afternoon Steffen.

[Steffen Føreid:]

Good afternoon Liam.

[Liam Burke:]

Steffen, you mentioned in these press release, general risk in terms of the ability of the counterparties to be able to deliver. Is this COVID-19 related or is this just a general caution about the overall FSRU market for the time being?

[Steffen Føreid:]

Yes, I think it is a general statement we have had for some time and we have in relation to the COVID-19. All our assets have been put forward according to contract and all our clients have been delivering their obligations and there has been no discussions around any change to the time charter. So, we see that our clients have performed their obligations. So, we don't see necessary any increased risk associated with the counterparty. But it is a general statement that we make in our documentation.

[Liam Burke:]

Okay. And on the operating expense side, I know it wasn't a material change, but you did have lower year-over-year expenses. I know you highlighted the potential of COVID-19 increasing them, but what kept expenses so low in the first quarter?

[Steffen Føreid:]

So we had some lower - spare parts and external services and that were the two main components of driving the reduction.

[Liam Burke:]

Thank you, Steffen.

[Steffen Føreid:]

We have compared to the same quarter last year, we did see in fact a reduction in operating expenses, which is good.

[Liam Burke:]

Thank you.

[Operator:]

[Operator Instructions]. Our next question comes from [Craig Dana] (Ph) from Palm Beach Capital. Please go ahead with your question.

[Unidentified Analyst:]

Hey, Steffen it looks like a really good job in a very difficult environment. Looking at your cash flows, I see that you have had, you are really only negative that I could find in the whole financials versus unrealized loss on derivatives. Is there anything else that, you can tell us that might negatively impact cash flows and your ability to continue to pay this steady dividend for the next couple of quarters or so that maybe not jumping out at us?

[Steffen Føreid:]

Yes. This is this correct. This quarter was a good quarter. It is a good operating performance and no extraordinary items. So in many ways, it was a very good quarter. I think we have highlighted the main risks as we see them, and in terms of counterparty risk and impact from COVID-19, so far we have not been materially impacted by COVID-19. But the situation is unfair and it can change quickly. We are doing as much as we can to prepare for adverse development and implement measures to mitigate that. But I think COVID-19 is a situation that is difficult for everyone, and we are putting a lot of time and resource in mitigating the risk associated with that. So, I think maybe that is the biggest risk element in the quarters ahead of where we don't really know what the consequence of the pandemic and how that will pay off.

[Unidentified Analyst:]

And, so it looks like, other than this unrealized loss on derivatives, everything is pretty much the same. It just continues to go, you have got these nine-year contracts. So, it looks like a very steady business to stay invested in and to continue to grow the investment. I'm looking at your opportunities in Australia and Asia which sound like obviously everything takes a long time, but that looks pretty exciting. What is going on in Europe, you said that business is going quite well too. Is there some good growth opportunities there?

[Steffen Føreid:]

We see that Europe has been a growth market for LNG and they have actually been driving much of the demand over the last 12-months. That is very interesting Europe has previously taken most of - is taking most of its gas from the pipeline, but the fact that LNG is going to Europe is interesting. So I think there is lot of opportunities that follows that where there might be needed more points for importing LNG, so Europe is offering some opportunities. We mentioned this project in - and we also have one bilateral project that we are working on - European side of the - where we are looking at bilaterally developing a project. So Europe is a place where there are some opportunities available in the years ahead.

[Unidentified Analyst:]

Okay, thanks Steffen. Great job.

[Operator:]

[Operator Instructions]. And ladies and gentlemen at this time I’m showing no additional questions. I would like to turn the conference call over for any closing remarks.

[Steffen Føreid:]

Okay, thank you. I would just like to thank everyone for dialing in, and listening and for asking questions and thank you for the session today. Thank you.

[Operator:]

Ladies and gentlemen with that we will conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.