Golar LNG Partners LP (NASDAQ:GMLP)
Q3 2016 Earnings Conference Call
November 30, 2016, 11:30 AM ET
Graham Robjohns - Chief Executive Officer
Brian Tienzo - Principal Financial and Accounting Officer
Hillary Cacanando - Wells Fargo Securities
Jon Chappell - Evercore ISI
John Humphreys - Bank of America
Espen Landmark - Fearnley Securities
Randy Giveans - Jefferies
Good day, and welcome to the Quarter Three 2016 Golar LNG Partners LP Earnings Conference Call. Today's conference is being recorded ladies and gentlemen, and at this time, I would like to turn the conference over to Mr. Graham Robjohns. Please go ahead, sir.
Thank you, and good day to everybody. I am also joined here today by our CFO, Brian Tienzo.
Moving straight into the presentation and past Slide 2, which is our forward-looking statements. We will start at recent highlights on Slide 3. Earnings were improved again this quarter with a net income attributable to unitholders at $56 million and operating income at $71.6 million for the third quarter of 2016.
EBITDA was also increased from $91.7 million last quarter to $96.9 million in this quarter. Distributable cash flow was also improved at $55.1 million for the third quarter with a distribution coverage ratio of 1.37 compared to $47.9 million and a ratio of 1.25 for the second quarter.
Subsequent to the quarter end, we of course entered into a transaction with Golar to reset our Incentive Distribution Rights in exchange for the issuance of new IDRs and new common and GP units. With the existing level of distributions, this is approximately cash neutral day one but of course significantly reduces our cost of equity going forward and better positions us to make further acquisitions and grow distributions as we go forward.
Moving on to Slide 4, on our income statement, in reviewing the financials for the quarter, you should note that until the Golar Tundra commences operations and the arrangements with Golar LNG including the Partnership’s right to require that Golar repurchase the Tundra in May 2007 fall away, Golar will continue to consolidate the Tundra during which time the earnings and net assets of Golar Tundra will not be reflected in the Partnership’s financial statements.
What is reflected is the approximate gross $3.6 million per month that Golar is paying to the Partnership in respect to the Tundra less the operating expenses and debt service related to the vessel. This net amount is recognized as part of interest income. The project in Ghana that Golar Tundra is contracted to serve seems now to have been kick started into progress with WAGL having received parliamentary approval for their now 10-year gas sales agreement recently and constructive discussions continue between Golar and WAGL and indeed, just yesterday, we received the first payment of hire from WAGL.
Our total operating revenues increased $111.8 million in the second quarter to $113.8 million in the third quarter. The increase is principally due to an additional calendar day in the quarter and a revenue increase resulting from the effect of escalation factors on the operating elements in some of our time charters.
Off-hire for the Golar Maria in Q2 of five days was matched by four days of unscheduled off-hires for the Golar Spirit in Q3.
Vessel operating expenses at $13.4 million were significantly lower than the second quarter cost of $16.9 million and half of the decrease related to a reduction in repairs and maintenance costs for the Nusantara Regas Satu following its annual maintenance window during Q2 and the balance of the decrease mainly reflects reduced levels of operations aboard two of the FSRUs resulting in some operating cost savings together with general savings across the fleet. We do however expect that operating costs will be slightly higher in Q4.
Interest expense of $15.6 million for the third quarter was higher than the second quarter’s $14.6 million. A full quarter's interest expense was incurred on approximately $94 million of additional debt drawn from the new $800 million debt facility to provide part of the funding for the Golar Tundra acquisition and this was offset in part by lower debt as a result of $24.9 million of debt principal repayment in the quarter.
Other financial items were a gain of $6.9 million for Q3, compared to $15.6 million loss in Q2. This was mainly driven by non-cash mark-to-market gains on interest rate swaps which contributed $10.9 million to the Q3 gain, compared to a loss on swaps of $7.1 million last quarter.
Given that we have virtually no expected off-hire in Q4 and the Igloo FSRU Igloo regas season has been extended by its charters to the end of the year, Q4 operating earnings are expected to be only slightly lower than Q3 as a function of slightly higher expected operating expenses.
Moving over to the balance sheet. As I have already mentioned, the balance sheet does not reflect the Golar Tundra as an asset or the asset-specific debt related to the Tundra of approximately $220 million.
There is not too much to say on the asset side of the balance sheet, so we will move over to Slide 6 on the liability and as you can see the bottom of that slide as at the quarter end, net debt was $1.3 billion and our net debt-to-EBITDA ratio calculated by using Q3 annualized EBITDA was 3.4. Our percentage of net debt swap to the fixed rate is a 100% as at the end of September.
Moving over to Slide 7 on our distributable cash flow. Distributable cash flow was improved this quarter at $55.1 million compared to $47.9 million last quarter as a result mainly of improved EBITDA and this also drives the improved distribution coverage ratio of 1.37 versus 1.25 last quarter. And we should point out that our maintenance and replacement CapEx deduction, approximately 75% of which is replacement CapEx is running at just under 50% of our current distributions, a level that I think we believe is relatively high and conservative.
We should also point out that distribution for Q3 was slightly higher as a result of the transition from the old to the new IDRs. Q4’s distribution, assuming of course that distributions are paid at the same level as Q3 would be more in line with Q2’s total distribution of $38.2 million.
On Slide 8, we have our usual slide showing the development of our distributions and coverage since IPO which shows that our average distribution coverage ratio over the last twelve months is 1.29 and our average - leverage ratio remains consistently below 4.
On Slide 9, the asset in contract slide, you can see our revenue backlog as at the end of September was $2.3 billion and the average remaining contract term of our contracts was 4.3 years although this is skewed a bit by the carriers that come off contract at the end of 2017 as the average contract term for FSRUs is actually over five years.
The three LNG carriers that do come off contract at the end of 2017 only represent a small proportion of expected annual revenues, but regardless, there are continuing signs of a strong LNG carrier market improvement as we approach 2017, which greatly improves our recontracting position and of course, we continue to work on potential term business for these vessels.
On Slide 10, some of you will have seen this slide if you were listening to Golar LNG Limited’s presentation, but I think it’s a good representation of the integrated group structure that we now have with the business partners supporting in the upstream and downstream ends of Golar’s core business competency. Together, I think this creates a powerful dropdown story for Golar LNG Partners moving forward.
Slide 11, on Shipping, as I said earlier there continues to be clear evidence of an improving short-term shipping market and it’s expected to continue to improve moving forward. This has also developed into interest for medium and longer-term requirements.
For the large amounts of new LNG supply coming in and an order book that is likely insufficient to transport it, we expect the market to continue to improve, which again as I said, improves the Partnership’s negotiating position with regards to recontracting the Golar Grand, Maria and Mazo.
Moving over to Slide 12 on FSRUs, the growth in the FSRU market is also set to continue I think as the flexible and cost-effective floating regas solution combines with a combination of lower energy prices, increased availability of gas and demand for power.
Golar’s position in the market has been aided added to with the Golar Power JV with Stonepeak that was specifically target gas to power opportunities and of course the 25-year contracted FSRU for the Sergipe project is a potential acquisition target for the Partnership.
There are also multiple other FSRU projects being worked on including potential recontracting opportunities for Golar Partners existing FSRUs.
Moving on to Slide 13, momentum is certainly building in the FLNG segment with the formation of OneLNG and the announcement of the joint venture between OneLNG and Ophir to develop the Fortuna FLNG project.
The Hilli Perenco project is also progressing well and it’s scheduled for startup in September 2017. The lower end of the spectrum of expected EBITDA is approximately $170 million per annum based on 50% utilization that Golar in discussion around the possible expansion of the utilization beyond 50%.
We have, as was noted in the results release commenced preliminary discussions with Golar with regards to the potential dropdown of Hilli, which obviously represent a significant addition to the Partnership’s revenue backlog.
Moving over to Slide 14, and of course improving the potential economic benefits for unitholders for future acquisitions is of course the IDR reset transaction with Golar which we announced shortly after the quarter end. We have exchanged our existing IDRs for new IDRs and up to 3.7 million common units and 76,000 general partner units.
As you can see from the table, the new minimum quarterly distribution has been set at the current distribution level of 57.75 cents per unit and a new target so they understand it 115%, 125% and a 150% of the new MQD.
From a day one cash perspective, the effect is pretty neutral. Distributions paid under the existing IDRs of approximately $8.6 million per annum are roughly equal to the new MQD with the total number of units – new units, 20% of those new common and GP units are however held back as part of an earn out over the next two years.
The key benefit for the Partnership of course on a go-forward basis is that, this reduces our cost of equity and so better positions us to pursue strategic acquisitions and grow distributions going forward.
So in summary, on Slide 15, we believe we are in a very good position. We have a solid contract base on a 4.3 average contract term. We continue to show excellent operating results. We have a strong financial profile with a net debt-to-EBITDA multiple of 3.4 times as at September 30 and an average coverage ratio of 1.29 over the last twelve months.
As already mentioned, this – that coverage of 1.29 is after deducting maintenance CapEx, maintenance and replacement CapEx, which is currently running at close to 50% of current distributions. LNG is a growing market with increasing demand for infrastructure and we have some extremely interesting acquisition opportunities from Golar with the Hilli FLNG now clearly identified as a dropdown opportunity.
Thank you very much. Operator, I’ll now hand it over for Q&A.
Operator Instructions] Our first question comes from Hillary Cacanando from Wells Fargo. Please go ahead. Your line is now open.
Hi, thanks for taking my questions. So you know we’ve seen the LNG carrier market improve a lot in the past few months, but you’ve noted that the market is still not at a level to take the Golar Grand out of layup. Just wondering what it would take to get that asset out of layup, would the rates have to be significantly higher or just maybe another $10,000 or $20,000 a day?
I think, I mean, just stepping back, one of the reasons that kind of stopped this taking out of layup is it is due for dry dock, so there is sort of some cost would be incurred to revive it from layup but then we got a dry dock to pay for. So I don’t – I think headline, current charter rates are probably at around a level that would – that justify the – it’s more of an issue of utilization of the vessel. So if we could guarantee continue operation, then I don’t think we are too far away from that decision.
Okay, great. And then, I just wanted to understand, obviously the Hilli is owned 100% by Golar, but in the future, future drop downs from the JVs, the Golar Power and OneLNG JV, would you be just buying Golar’s share of the asset and then account for it as like an investment in affiliate like Golar is doing right now or would you be considering buying 100% of the – buying out the other partner’s share as well?
It could be either. It’s certainly, I think that same enthusiasm for the structure we have with the MLP within the JV group.
Okay, okay. Good to know. Okay, thank you very much for taking my questions.
Thank you. Our next question comes from Jon Chappell from Evercore ISI. Please go ahead.
Thank you. Good afternoon guys.
Graham or Brian, little bit of a repayment I don’t want to say issue, but maybe overhang in 2017 with the bonds, unsecured bonds due in October. It doesn’t seem like you can have the same type of solution that Golar LNG decided its convert. So can you just talk about your plans for that, whether it’s refinancing hitting the bond market again or other options?
I think the [inaudible] will be on a refinancing and we’ve – I think we’ve probably said last quarter that we have our eye on the market. Obviously, a bit early now, but if we see a good opportunity we will go and we have the benefit of having a pretty low leverage ratio certainly in comparison to some of our competitors at 3.4 times. So, yes, bond refinancing is the most likely outcome.
All right. Thanks, Graham, and is there any other meaningful debt amortization and any other credit facilities for 2017?
Yes, all the debt facilities amortize or continue to amortize the $800 million facility and the other specific vessels debt facilities. But that’s regular principal repayment, not maturities, it’s that what you meant. So we don’t have any other bank debt maturities before about 2018, I think there is a small one and then the big one is 2021 which is a new $800 million facility.
All right, so no big bullet payments is what I was…?
Thanks. Just as more of a technical question, but just trying to understand, you mentioned the $94 million draw down in the press release and you also mentioned it in your comments as being part of the reason the interest expense went up. It’s not flowing to the cash flow statement. So, is it just because it’s related to the Tundra and it’s not consolidated and then if that’s the case, why would it impact the interest expense directly?
That $94 million debt draw down was part of the $800 million facility draw down. So we drew down, I think from memory, $775 million and we repaid something about $680 million. So there was a net draw down of that $90 million.
Go ahead, Graham.
Yes, and that – so, the only thing related to Tundra that’s kind of effectively used on the balance sheet is that, what is actually $100 million that was paid to Golar as a deposit if you like for the Tundra and that $100 million is sitting in a related party – long-term related party receivables on our balance sheet.
Okay, great. I’ll turn it over. Thanks, Graham.
Thank you. Our next question comes from John Humphreys from Bank of America. Please go ahead.
Hi, Graham, this is for you. You had mentioned your fourth quarter expectations, but just sort of missed some of the detail you walked through. If you could sort of repeat your comments on some of the expense items would shift a little bit and operations?
Yes, I think, there is two key things, well, three key things. We don’t have any expected off-hires. We – Golar Igloo has this contract where it has a regas season that runs from the 1st of March to the 30th of November and we get paid during that time and then we don’t get paid for December, January, February. In some years, they extend that season and they have done this year. So it will run up to the end of December. So we will get paid a full quarter and so that will be comparable with Q3. And then the only thing really that’s going to impact Q4 results is the fact that we expect operating expenses to be slightly higher.
Great. Thank you. And then, just sort of stepping back with the FSRU market overall, there have been recent reports that even with the new LNG supply that’s coming online, it’s being absorbed fairly well and also FSRU supply is increasing. If you could just sort of give your expectations on future FSRU rates over the next couple of years compared to the rates you are seeing in the current charters?
So, I am not sure - 100% sure what you meant by the first points around new LNG supply being well absorbed. But bear in mind that, there is a lot more regas capacity in the world than there is LNG production and supply, but it’s concentrated in particular places, in Japan, in Korea, in the US where it’s obviously fairly useless at the minute. So, there are plenty of countries around the world that don’t have access to LNG and these are the countries and areas that are looking to contract FSRUs to get access to natural gas which is now extremely competitive with oil and actually competitive with coal in some places as well. And so, that’s where we think the growth and the demand for FSRUs will come from. There are – there are being one or two additional FSRU competitors coming to the space over the last few years which is kind of not being unexpected, but I think particularly with the Golar Power offering where we are looking to sort of joint venture with – if you like with power projects where you are bringing in FSRU and a power solution we have a little bit of an advantage there and ability to potentially create a sort of captive market for our FSRUs.
Great. Thank you. And, I think the – sort of report that was reading as, the price of LNG was holding up fairly well given the increased supply coming on and my last one sort of touches on what you just mentioned there, Golar Power and you mentioned an interesting 2020 opportunity for a drop down. It would primarily focus on the FSRU drop down, you touched on this a little bit before, I guess, is it too early to tell kind of how this is a sort of a new structure being involved into the energy power business. I am just trying to get a handle kind of what a drop down there?
Golar LNG has an omnibus agreement and kind of an agreement to be offered to – by FSRUs contracted for a period of five years or more with Golar Power and the same way that it does with Golar LNG and so in the first instance that will be a potential opportunity for an FSRU drop down and, obviously the MLP – there is nothing similar for power station assets, but and we haven’t sort of particularly looked at that, but because we are not kind of a US-based tax partnership, there is nothing to stop this dropping our power asset down, if I can put it like that.
Got it. That’s it for me Graham. Thank you very much.
Thank you. Our next question comes from Espen Landmark from Fearnley Securities. Please go ahead. Your line is open.
Yes, hi guys. Two questions if I may. First be on the cost side, I mean, there is a $3.5 million improvement quarter-over-quarter and you mentioned half is on the Nusantara, but I was wondering, you can kind of give us more color on the reduced operations that you mentioned on to on the FSRUs and is that’s kind of something we should account for going forward as well?
What we – that’s related to the reduced throughput of the FSRUs and so, if it’s not working as hard the maintenance and consumables and spares and something just a little bit less, but it’s a little bit difficult to be a kind of production gotten down, it’s difficult to forecast.
All right, that’s great. And then, secondly, you know the two - the Golar Spirit and the Golar Igloo, I was just wondering if you can kind of discuss the current output and use of the units and kind of the outlook for an extension or a possible redeployment?
So, they have been idle for a little while, but that’s not kind of unusual in the period since they went on contract in the sort of mid 2000, so it won’t turn particularly as being sort of on and off and on and off and it depends a little bit on how much it ranged in Brazil and how much they are getting power from the hydro dams. But that’s kind of always been the case and those FSRUs are in large part, energy security for Brazil as opposed to sort of baseline supply although having said that the Spirit is a bit more base load than the Golar Winter. We have had some initial discussions with Petrobras around extension in respect to the Spirit, but they – it’s kind public knowledge they have a process ongoing where they are looking potentially at the sale of two of their terms and that was one of which is where the Golar Spirit is, those sort of discussions are kind of on the hold until they have a resolution to that process.
All right, that’s helpful, Graham. Thanks.
Thank you. Our next question comes from Randy Giveans from Jefferies. Please go ahead.
Thank you, operator. Hey guys. Good quarter. Just two quick questions, looking at the distribution coverage ratio, 3Q 2016 it was 1.37 times and I think average for the year it was about 1.25, 1.26 times. So what is your target distribution coverage ratio next quarter 2017, 2018?
Well, I think that in terms of next quarter, we’ve – the reason the ratio is higher this quarter is the last quarter was because we had improved EBITDA. So as I said, in answer to one of the earlier questions, we expect operating earnings to be slightly down because of increased operating expenses. So you – and revenue will be the same because the Igloo’s regas season has been extended. So, you should see a sort of slightly lower coverage ratio. Then in Q1, every year, we have a reduction in the ratio because there is two months without hire baked into the contract of the Golar Igloo and then for the balance of 2017, we kind of don’t tend to give guidance out that far, but there is nothing particularly happening in 2017 that’s that much different from 2016 other than of course the timing of the startup of the operations of the Golar Tundra, which would significantly improve the coverage ratio.
Sure, sure. And then, with the new IDR K rules, you can get the distribution up to $0.56 without hitting into any IDR splits. So for distribution growth guidance, would that not come until you acquire maybe part of the FNG Hilli or something like that or is there an opportunity for growth before another acquisition?
Well, that’s – I mean, we tend to give we only really give guidance on distribution increases as and when we do acquisitions.
Okay. Probably that’s fair and then just a last that you mentioned earlier with your leverage ratios being one of the best in the industry, I think current net debt-to-EBITDA 3.4 and then current EBITDA-to-interest is over 6 times. Do you all have targets for that in terms of kind of leverage ratios that you are comfortable with?
Yes, the debt-to-EBITDA ratio, we tend to try to keep at or below 4 times. Obviously, that studies, and if you’ll see that slide in the presentation, which shows as being at below 4 since IPO. The only caveat to that I would say is that, in our industry, the longer your contract gets, the sort of tendency is to towards a slightly higher leverage ratio. But obviously, if you’ve got sort of an average contract terms of 15, 20 years and people can be more comfortable with a slightly higher leverage ratio.
Sure, okay. I think that covers it for me. Thanks again.
Thank you. We have no further questions at this time.
Okay, well, thank you everybody for listening again this quarter. We will speak to you in the New Year and Merry Christmas although it’s a bit early and as I say, I look forward to speaking to you in February. Thank you operator.
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