HMLP Balance Sheet
Description
HMLP is an MLP that owns floating storage and regasification units (FSRUs). The company wholly-owns three FSRUs (Gallant, Grace, and the Lampung) and has a 50% joint venture interest in two smaller, older boats (Cape Ann and Neptune). The FSRU industry typically operates under long-term contracts in which a daily “capex” rate is paid in addition to pre-negotiated operating expense and tax reimbursement. Each of HMLP’s FSRUs are contracted through at least 2026, and most of the company’s contracts extend past the end of the decade. The common units of HMLP were listed on the NYSE until September 2022, when the partnership was acquired by parent Hoegh LNG Holdings. Hoegh LNG Holdings is one of the largest FSRU owners globally and is a 50 / 50 joint venture between Morgan Stanley Infrastructure Partners and Leif Höegh & Co. During December 2022, HMLP announced that it would voluntarily delist and deregister its preferred units to reduce reporting and compliance costs. I recently confirmed this statement with the CFO, who mentioned annual cost savings of $6-7 million. The delisting triggered forced selling from investors unable to hold OTC / unregistered securities. Moreover, the deregistration resulted in the units being classified as “Expert Market” securities. This classification has limited the universe of purchasers given the challenges associated with trading Expert Market securities. The price of the units fell precipitously on the delisting news from $20.95 (a 10.4% perpetual yield) to $13.00 (a 16.8% perpetual yield). As a result of this technical dislocation, I believe that the preferred units are undervalued and offer an attractive, well-covered distribution yield. The JV FSRUs are currently limited in their ability to upstream cash due to debt covenants, but the wholly owned FSRUs should generate ~$110-120 million of EBITDA in 2023. After interest, debt amortization, and taxes, I estimate cash available for distribution of ~$45-50 million versus $15.5 million of annual preferred distributions. The company is currently restricted in its ability to upstream cash from the Lampung (which has a separate credit silo from Gallant and Grace) due to ongoing arbitration with the Indonesian government. The arbitration relates to a 2021 effort by the government to terminate what it perceived as an above-market contract. While the company and its legal advisors believe that the case has no merits (and FSRU market conditions have changed dramatically since 2021), the company agreed as part of a debt refinancing to cease shareholder loans / dividends until the arbitration is complete. Importantly, the Indonesian government continues to make regular lease payments, and the company should generate $35-40 million of cash available for distribution excluding the Lampung in 2023 (for a preferred distribution coverage ratio >2x). Net leverage at the Lampung is ~0.4x EBITDA, suggesting ample room to re-lever once the arbitration is complete.