Höegh LNG Partners LP (NYSE:HMLP)
Q3 2016 Earnings Conference Call
November 17, 2016 8:30 AM ET
Richard Tyrrell – Chief Executive Officer and Chief Financial Officer
Fotis Giannakoulis – Morgan Stanley
John Humphreys – Bank of America/Merrill Lynch
Good morning and welcome to the Höegh LNG Partners’ Third Quarter 2016 Results Conference Call. All participants will be in a listen-only mode. 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 sir.
Thank you, Whitney [ph]. Good morning ladies and gentlemen. And welcome to the Höegh LNG Partners’ third quarter 2016 results.
On Page 2 and Page 3 we have a few forward-looking words and abbreviations to take note of. Before getting into the main event and turning to the highlights on Page 4, let me take you take you through them one by one.
The third quarter was a good quarter for Höegh LNG Partners and we’ve also again generated strong cash flows from our stable, fixed-rate contracts. We declared a cash distribution of $0.4125 per unit, supported by our long-term contracts on which there’s still an average of 13 years life remaining.
I have decided not to put our headline numbers in table format this quarter, I hope it makes them easier to reach. Let me run through them. Höegh LNG Partners reported time charter revenues of $23.3 million for the third quarter 2016 compared to $11.5 million for the third quarter 2015. This is primarily down to the acquisition of Höegh Gallant that closed in the fourth quarter of 2015 and the effects that we see all the way down the table.
We generated operating income of $20.3 million for the third quarter of 2016, compared to $7.5 million in the third quarter of 2015. Reported net income was $13.4 million for the quarter 2016, compared with $5.2 million for the third quarter of 2015.
The next row excludes the non-cash effects of our long-term interest rate swaps, which for the first time in a while increased in value a reversal in trend that’s looking set to continue into this quarter.
Operating income, excluding gains on derivative instruments, were $16.1 million for the third quarter 2016, compared to $9.6 million for the third quarter 2015. Net income, excluding gains on derivative instruments, was $8.8 million in the third quarter 2016, compared to $6.9 million for the same quarter in 2015.
Below these headline numbers, you will see segment EBITDA, which includes EBITDA from JV vessels no a proportional basis. They can be seen to have increased to $24.9 million for the third quarter of 2016, compared to $16.1 in the third quarter of 2015.
this point, you may well be asking what happened to adjusted EBITDA? Well, we have tried to reduce the number of measures and the need for reconciliations. Instead, we have listed the other contracted cash flows that are excluded from segment EBITDA [indiscernible]. These are namely the principal payments of direct financial lease on the PGN FSRU Lampung project. The amortization in revenues for Gallant contracts that was deemed to be above market on acquisition. And to paint the full picture, an amount of deferred revenue that is related to amortization on the JV vessel that is paid for by the customer and that is not part of the higher rate. If you want to understand the cash generation from contracts, think of our accounts on an operating lease basis, or back calculate [ph] day rates, these three line items need factoring in.
I will get back to distributor cash flow later in the presentation, but these results indicate our coverage ratio for the quarter of 1.14 times.
Page 4 lists our four assets that I'm sure are familiar to many of you. Our assets are collecting customer to the global LNG market, making them highly strategic in many cases.
The Neptune is currently in a shipyard in Marseilles, undergoing minor modifications in readiness for a new regas project that Engie has lined up for us. The Cape Ann remains in Tianjin, China. The PGN Lampung is located in Indonesia and sending out gas to both Sumatra and Java, including the large [indiscernible] market.
The Höegh Gallant, the newest addition to the HMLP fleet, continues to operate at close in maximum utilization levels in Egypt. For maintenance work we reported done in the last quarter was completed back in July. That means that there were some associated costs in the third quarter that came to approximately $400,000, an amount that has been received and warranties and indemnities that are in place.
The operatings that would have been higher of this amount – would have been higher by this amount had the work not been necessary, but thanks to the warranties and indemnities, it had no economic impacts on HLNG partners.
Page 6 provides a reminder that Höegh LNG Partners really does have some of the longest contracts in the business. The cash flow from our contract enables the payment of our distribution, an independent distribution coverage. Our contracts have averaged 30.3 years of life remaining, and it's not until 2025 when we first go without contracted revenue. Not that we are expecting it to be especially difficult to secure our extensions or find alternative projects for our assets in the future.
The strategic nature of an FSRU and the ability to move them are big pluses in this regard. Our contracts are fixed rate, I've not exposed to [indiscernible] our commodity prices, OpEx exposure is also limited in most cases. I believe these characteristics make our contracts uniquely well-suited to the MLP structure, and they provide a solid foundation for long-term distributions, and with the dropdowns, future growth.
Turning to the dashboard on Page 7 this tracks how Höegh LNG Partners is delivering on its business plans in practice. The cash flows are pretty stable, the distributions are fully covered, and the first step in our pathway to growth has been achieved with the dropdown of the Höegh Gallant.
Segment EBITDA should be steady, which it is. Adjusted net income should slowly start to rise as debt amortizes and interest cost falls, which it is starting to do. Distributable cash flow should more than cover distributions, and the 1.14 times level achieved in the third quarter of 2016 is a level that we believe is comfortable, given our young assets and long-term contracts. And last but not least, distributions have been consistent and are expected to be driven further by our strategy of making accretive acquisitions from Höegh LNG.
Page 8, has the income statement for the third quarter of 2016. The operating numbers you see relate to the PGN FSRU Lampung and the Höegh Gallant, with the JV units flowing in as equity earnings of joint ventures. As a reminder, this is impacted by the non-cash effect of interest rate swaps for which numbers are excluded, as the effects were presented in the highlights section.
Quarter-on-quarter comparisons reflect the addition of the Höegh Gallant to the portfolio. The next quarter we will facilitate more direct comparisons, given that Gallant will be owned by Höegh LNG Partners for a full year by this time. The reported net income for the quarter was $13.4 million.
Turning to Page 9, you can you can see additional color on how the JV units are performing. The segment EBITDA for JV FSRUs of $8.6 million in the third quarter of 2016, compares favorably with the $8.3 million for the same quarter in 2015, as set out, I believe. The joint venture column also shows the considerable gain on the swaps in the quarter that was mentioned previously. The segment EBITDA table also provides a useful breakdown of overhead costs. These show up under the other column at $1.7 million, they are higher for this quarter than last year's $1.4 million for the same period, and this is a difference that primarily relates to the costs in the quarter filing of [indiscernible] Registration Statement, which as of yesterday evening is effective.
Page 11, breaks down the financial income and expense side of the P&L. The 2015 numbers are pre-Gallant and the 2016 numbers are post-Gallant. Pre-Gallant, the IPO proceeds were on loan to the parent and generating interest and you can see this has now fallen away. The proceeds of costs were use to fund the Gallant. And similarly the Gallant transaction source [ph] assume an additional of $183 million of debt and that is reflected in the higher interest expense for this quarter, compared to the same quarter of last year.
Page 12, set our Höegh LNG Partners balance sheet as of September 30, 2016. The cash balance is healthy, $15 million has to be maintained for the purpose of the covenant in the Gallant facility. But I’m also pleased to note the reduction in debt. Since the end of last year, long-term debt at the consolidation level is just falling from $331 million to $308 million or by $23 million. This is preprogrammed under the amortization schedule in our facilities agreement. We did draw $5.4 million under the revolving credit facility in the quarter, as previously flat and reduced $3.2 million has been drawn since the end of the quarter. Since the distribution is now being paid no further drawings are expected before the year end.
Turning to Page 13, you will see our distributable cash flow for the quarter. Starting with segment EBITDA, we add back the contracted cash flows by the flow in as principal payments on the direct financial lease related to the PGN Lampung. We identified [ph] amortization in revenues for above-market contracts on Gallant. We take away the effects of the first revenue recognition on the JVs to further adjust for financial items and as the indemnity and trust warranty payments received $400,000 that which was related to Gallant as previously mentioned and $300,000 of which is a legacy amount related to Indonesia that will apply until the local entities presumes startup losses and is in a tax paying position.
We subtract $3.9 million to provide for replacement CapEx and for unit maintenance. This includes a dry-docking provision for the units where it is for our account and not the customers. Together, the result in distributable cash flow up $12.5 million for the third quarter of 2016, which when compared to our distribution of $11 million represents a coverage of 1.14 times for the quarter.
Page 14, simply provides a reconciliation of the same to these U.S. GAAP measure of net cash flow provided by operation activities. [Indiscernible] my commentary on the numbers, I am more than happy to take questions on them mostly gets to Q&A stage. The units are being falling according to contracts and I’m pleased the outcome. But I would like to say a few words on what’s next before we get to Q&A.
Page 15, is a page that hasn’t changed in while, but I hope and expect to see it changing soon with the dropdown of the Höegh Grace. As disclosed by Höegh LNG, the units have arrived in Colombia, and if you are an avid follower of the ship-tracking websites, you'll see that the LNG carrier British Innovator is in the process of delivering a commissioned cargo of LNG from Atlantic LNG in Trinidad. As I've said before, the acquisition for the Höegh Grace represents an excellent [ph] opportunity for Höegh LNG Partners, and this is now clearly in view.
There are, of course, additional growth opportunities in the pipeline and these should enable Höegh LNG Partners to sustain a steady rate of making accretive acquisitions and further drive our distribution growth.
Page 13 sets out how we see the portfolio developing. It is a repeat of a slide presented at our Investor Day in October. And if you refer back to that presentation you’ll see exactly why we believe so strongly in Höegh LNG Partners. The Höegh LNG group as a whole, and the FSRU sector in particular.
I understand from Höegh LNG for the business development side of the pipeline our new FSRU projects remain strong and believe the case illustrated on Page 13 is what a new realistic but also very achievable.
And with that I’d like to draw your attention to Page 17, and a backdrop open – and we’ve added to the backdrop open up the mic to Q&A. Amy, if you could do that I would appreciate it. Thank you.
Thank you. [Operator Instructions] And our first question comes from Chris Wetherbee with Citi.
This is Alex Honig [ph] in for Chris. I just wanted a little bit more color, is there any visibility into the timing of the Grace's dropdown, maybe later this year or early next year?
The MLP has the right, or should say the parents have an obligation to offer the asset to the MLP, assuming it goes on higher, it goes on higher once it is accepted, and it is very close to being accepted. The vessel is currently receiving its provisional cargo, which I think commission can be some indication of where it is, where it is in the inspections process. The MLP has the right to acquire it shortly thereafter.
Okay. Also, with the trajectory of the world fleet development, overall, where do you see rates going forward?
It’s a question often asked ourselves, Alex, because I think it is a good one. You know, we do not have a lot of data points in the FSRU space, it is an awfully young sector. But, as of now, we see rates holding up very well. There is a bit of a correlation between the level of rate and the duration of the contract, as you would expect. would expect. But, in general, there is good consistency across those contracts that are being awarded.
Going forward, we do observe extremely competitive pricing from the yards at the moments, which as you know are the start of the business these days, given the state of the wider shipping market and the loss of oilfield related work. And, that means that we can today get FSRU at a lower price from what we paid two years ago. Will that have an impact on rates going forward? I think it will. But, I don't think it will have any major impact on returns.
Okay. That is helpful. And my last question is regarding [indiscernible] costs, they are coming down, I just want to get color on the trend of converting newbuild over old vessels, and if there's differences in the ROAs of the boats?
The view of Höegh LNG is you're very much that if you have time to build a new vessel, then you build, and that is even more the case at the current yard prices. If you have not got time to build a new vessel and a new vessel takes about 28 months to build and about 12 months for conversion, then you know the conversion is an interesting alternative. But, you're not going to save much money by doing it if anything and the only benefit is time to delivery.
Okay, that’s helpful. Thank you. I will turn it over.
Thanks for the questions, Alex.
And the next question is from Fotis Giannakoulis at Morgan Stanley.
Yes. Hi, Richard, and thank you and congratulations for the commissioning and delivery of the Grace. I want to ask you about, although this is more of a parent question, about what is going on with tendering processes. We have heard that the Egypt, probably there is going to be some delay, what other projects are out there since your parents has one open vessel and is trying to expand even further the pipeline over drop downs?
Thanks for the question, Fotis. It is a good question, it is obviously, and in a way the parents responsibility, but it does affect the MLP because a new contract at the parent level becomes a – pipeline, got for dropdowns. And the vessel that I think you're referring to there is 2552, which is due for delivery. I think now in the second quarter of 2017 and ideally it becomes one of my dropdown candidates for later that year.
The activity, as I understand it on the tendering side is reaching a relatively advanced stage. And I think there are more than one opportunities that are under consideration for that particular vessel. You mentioned Egypt. That process is ongoing and that could be one of a number of opportunities. And obviously when we look at these things, we have to weigh up what makes most sense from a portfolio standpoint and what makes no sense from a project startup standpoint, and so on and so forth.
Can you also give us your view about the Chilean project, I think that the target was year end, is this still the target for this project?
Yes. The FID target you are referring to, I think, because the actual project is going to be a late 2018 and early 2019, actual startup. The project is contingent now on financing, but that vessel, I think, as you know, obviously, we sponsored the project and have said as much, so they have got all of the necessary permits and are in the process of just securing the final financing package.
Thank you. And regarding dropdowns, I just want to understand a little bit better, how do you plan to structure the dropdown of the Grace. What should we think as a multiple, and how is the Höegh MLP Partners planning to fund this asset? The yields have come down, but they are still higher than they were a year and a half ago, and I was wondering if this is going to be another experience of equity with debt or you can think of taking more shares, or even providing some seller's credit financing or some preferred equity financing in order to facilitate the dropdown. Can you give us an idea of what the structure is going to be?
Sure. In terms of how I think you should think about it, I think that you should look at the Gallant as a reference point, and obviously, there are differences, its contract longer, for example. But I use that as kind of a relative reference point. In terms of debts within multiples and the valuation and so on. When it comes to funding it, I think that the market is there now for doing these kinds of transactions, and I think because the market is there we can actually deliver some really quite attractive growth to our investors with dropdown.
After the starting point, the starting assumption that we dropdown 51% in the first instance, although there’s clearly flexibility there, and fund the majority of that with equity. I do think there is scope to collect any shortfalls, which is [indiscernible] credit from the parent, but the way I sort of would like to see it play out is an initial dropdown maybe with more equity, a subsequent dropdown with maybe a bit less, and if you remember, we have the $47 million settled credit outstanding from the Gallant.
And it would be nice at some point to refinance both that that maybe sort of refinance/pre-finance with our revolving credit facility/fund part of the dropdown of the second part of Grace with some debt, once we have [indiscernible] on our balance sheet to allow us to sort of raise a meaningful amount.
Richard, one last question, probably more of a question for the future, but we have seen that the MLPs when they go to the highest place, they are facing difficulty growing and doing additional dropdowns, you are still at a very early split at this point, but after the Grace, that might change or it might be close to change. Are there any thoughts of potentially resetting your IDR, something like some of your competitors have already done that could potentially give higher growth prospects for your distribution growth?
What you are saying there is something like that I clearly see if you run things out all the way to the 50% split. Right now, we're in the 50% split and moving towards the 20% – 25% splits, where I think we have the ability to grow and still deliver attractive growth to the LPs while we’re at that level. Once we get to 50%, it clearly becomes something of a challenge, and it is something which I don't know when, but I can see it being between us and MGP at some point in the future.
Thank you very much, Richard.
Thanks for the questions, Fotis.
[Operator Instructions] And our next question comes from John Humphreys with Bank of America/Merrill Lynch.
Hi, Richard. How are you?
I am well, thanks. John, how are your?
Good. I just wanted to go through your presentation from September, you'd laid out the available two FSRUs, it looked like there were three in 2017, three in 2018, and then one opened for 2019, 2020, 2021. And also there were three new importing countries estimated for 2016, so just an idea of sort of demand out there in the market, and I guess of overlaying what are available FSRUs with countries that are adopting this technology. And then if the recent election in the U.S. adjusts any of your expectations for the future?
Yes, the job you're referring to, John, others on the line, I believe, is a job from our Investor Day presentation back in October, which got quite a lot of detail on the FSRU market in general. Our view on the supply and demand of FSRU, it is reasonably well-balanced. I think while the scope for the uptake of FSRUs to ramp up, these projects do take time to come together, so we know that three to five over the next couple of years is a realistic number. We also know, because it takes a certain amount of time to build one of these things, exactly what is going to be available over that time.
And if you go through the FSRUs that are matching up supply and demand, you get pretty comfortable with what we have, what our competitors have, and what is being redelivered into the market in terms of existing assets that are up for re-charter can be absorbed. So, I think we're fairly comfortable with that situation. Going further out, you start having to look more at the business development pipeline and assessing how solid that is and see exactly when these and how these projects are going to be realized. But, of course, there is still time that in many cases to order a vessel or pursue this option that we have made for ourselves and others have to of converting an LNG carrier if the lead time is shorter.
Has U.S. election have an impact on the market, I would not like to comment on that at this stage. We still think it is a very compelling market. We think that LNG in general is compelling as a fuel. And we are happy to work with whatever the politicians word is.
Fair enough. Fair enough. The next one just trying to match up what you have on Slide 15 and 16 for dropdown candidates, and then the business development pipeline. So, taking a look, Independence remains on the dropdown list, which is not in sort of the pipeline that you see, is the expectation that the charter is not going to consent to a dropdown? And also, if you can also sort of generally sort of line up where these dropdown candidates, these four that you list here, and then how I sort of look at 2552, I see that where 2865 fits in Chilean conversion and so on.
Yes, I think the aim of page you're seeing was to sort of very much focus on what we think is deliverable, and the Independence is a little bit more out of our control, it requires customer consent, and that's why it was excluded, that is not to say it went sort of public on here in due course, but we thought we are sort of looking at [indiscernible] very much have the kind of issues that we believe to be within our control. The Grace is marked as being in 2016/2016, which I think has got very much the case, given the [indiscernible] possibility of it may well be dropped down into two halves.
These are the big assets, so that makes a lot of sense, I think. The 2552 getting marked as 2017, 2018, I mean I think it is safe to say that we do have, I think, cause for confidence in terms of where it's going to go. As a matter of fact, it is not exactly clear whether it will be in 2017 or 2018, but present – it will be figured out before too long half. Chile is known, that's contracted and subject to financing as comes it upon earlier. And then any other conversion and newbuild are really based upon our insights into the development pipeline.
Great. That is it for me. Thank you very much.
Thanks for your questions, John.
We show no further questions at this time. Mr. Richard, would you like to make any closing remarks?
Sure, well, thank you very much for listening, everybody. Thanks for the questions. I look forward to seeing everyone in due course. In the meantime, have a very good Thanksgiving.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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