Golar LNG Partners LP (GMLP) Q4 2018 Earnings Conference Call Transcript

GMLP earnings call for the period ending December 31, 2018.

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Motley Fool Transcribers
Feb 27, 2019 at 3:39PM
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Golar LNG Partners LP  (NASDAQ:GMLP)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 11:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Golar LNG Partners LP 4Q 2018 Conference call. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. (Operator Instructions) I must advise you that this call is recorded today on Wednesday, the 27th of February, 2019.

And I would now like to hand over to our speaker today, Mr. Brian Tienzo. Please go ahead, sir.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Thank you, moderator. And good afternoon and good morning to all of you. Welcome to Golar Partners' 4Q 2018 results presentation. My name is Brian Tienzo. I'm joined here by Head of Investor Relations, Stuart Buchanan.

So, let's start the presentation by jumping over to slide three for the main highlights. We reported income of $31.8 million for the fourth quarter of 2018. This result does not, however, include our interest in the operating result of Hilli Episeyo.

During the fourth quarter, we continued to experience the tail-end of off-hire days in respect to Methane Princess' drydocking and Golar Freeze's modification. Despite this, and as we guided in the last quarter's earnings announcement, with the help of full quarter's contribution from Golar Mazo and Hilli Episeyo, the fourth quarter saw improvement in distributable cash flows and resulted to an increased distribution coverage ratio of 1.2 times.

There were further positive news for the partnership, as charterers of both Golar Igloo and Gola Grand exercised their options to extend the vessel's employment for another year. As a result of the foregoing, the partnership announced unit distribution of $0.4042 for the quarter.

So, let's now turn over the page to go through our income statement highlights. Net results for the fourth quarter was a loss of $19 million as compared to an income of $49 million in the third quarter, and this is mainly due to the following non-cash factors.

In the third quarter, the remaining income at Golar Freeze and the DUSUP charter was recognized in that quarter. This amounted to $33.5 million. However, this income will actually be received by the partnership pro-rata up to April 2019. Of course, this is taken into consideration when we estimate our distribution coverage.

Also, due to decrease in medium to long-term spot rates relative to levels at the end of the third quarter, we've booked in this quarter a non-cash negative mark-to-market loss of approximately $27.5 million. And finally, and to a much lesser degree, we saw an increase in G&A of $4.7 million this quarter from $2.9 million in the previous quarter, due mainly to finalization of management fees.

The above were offset by a full quarter's earnings contribution from the Golar Mazo and Hilli Episeyo. We also witnessed a slight increase in net interest expense in the quarter, due to a small rise in LIBOR and higher debt balance following the drawdown of $50 million from our revolving credit facility.

Turning over to page five for the balance sheet assets. Our cash and cash equivalents increased to $96.6 million at the end of Q4, compared to third quarter level -- cash level of $75.8 million. During the quarter, $50 million was drawn from available credit facilities, in anticipation of paying for capital expenditures following the completion of the drydocking for Methane Princess, the modifications for the Golar Freeze and the January 2019 drydocking of Golar Igloo. As of end of 4Q, the partnership still had $25 million of undrawn credit facility remaining.

Going over to slide six, balance sheet liabilities. At the end of the quarter, our net debt position was $1.58 billion. This includes $455.3 million associated with Hilli Episeyo. As of the quarter end, the percentage of debt swapped to fixed rate was approximately 100%. The average fixed interest rate of swaps related to bank debt is approximately 2.2%, with an average remaining period to maturity of approximately 4.6 years. So the partnership is pretty well protected from interest rate variability.

Based on the above, our net debt to EBITDA ratio was 5.1 times. However, when we were to include the actual cash earnings of Golar Freeze for the quarter, this ratio would be improved and would go up to approximately 4.5 times.

Turning over to slide seven. So the solid results achieved in the quarter have manifested itself in a materially improved 4Q distribution coverage of 1.2 times. Our life-to-date distribution coverage of 1.12 times remains pretty strong, and is a slight improvement from last quarter's ratio of 1.1 times. Whilst we expect 1Q 2019 ratio to decrease from the 4Q level, mainly due to Golar Igloo's two months of regas season and the following factors give us confidence that we should see improved ratio again from 2Q '19 and onwards.

Firstly, Golar Igloo's extended charter have just recommenced. Secondly, charterers of Golar Grand have exercised their extension option and the economics of this option is superior to its previous earnings. And finally, Golar Freeze is expected to have completed its commissioning in Jamaica and earning upon hire (ph).

Furthermore, while an improved shipping market is not built into our earnings anticipation, we nevertheless expect 2Q '19 to show some improvement, which could further improve earnings through our spot shipping exposure into Golar Mazo.

So, let's turn over now to slide eight to look at the shipping update. With newbuild deliveries in 2019 expected to be front-loaded and along with this and seasonably warm winter so far, these factors have negatively affected shipping dynamics during the first quarter of '19.

However, looking ahead and as the shipping balance graph suggests, the overall shipping forecast for the rest of the year and indeed for 2020, remains positive. With the Golar Maria on charter until summer and now Golar Grand's employment extended to at least spring 2020, the partnership's short term shipping exposure is limited to the Golar Mazo. Since October 2018, the Golar Mazo have been in full-time employment up until recently.

However, the vessel could experience some commercial waiting time until shipping sufficiently improves, which is expected to occur in early summer. Of the partnership's revenue backlog of $2.3 billion, shipping revenue accounts for 7%, and less than 1% of backlog revenue is associated with short-term contracts. So, shipping volatility will have limited impact in the partnership's earnings.

Finally, just some words on the Golar Spirit. So the FSRUs currently in cold layup, offshore Greece. We have assumed no earnings contribution in our forecast, but of course, in the background, we are working on various employment possibilities in Brazil, West Africa and the Caribbean, to name a few areas. Investors should be rest assured then, that we are actively in pursuit in the employment for the vessel.

Turning over to slide nine, which depicts the partnership's revenue backlog of $2.3 billion, this remains significant. The most notable movement from previous version of this slide on our existing fleet is on Golar Igloo and Golar Grand, whose charterers have been extended by one year and in the case of Golar Grand, the charterer maintains a multi-year options at increasing daily rates. We continue to be excited with the potential of dropdown candidates, which include cash flows from the Hilli Episeyo, FSRU Nanook and associated cash flows in the Sergipe power project.

Golar LNG's share of the EBITDA of the latitude is approximately $100 million over a 25-year period. Furthermore, Golar latest FLNG project with BP, Kosmos with a 20-year contract term and an annual EBITDA of $215 million of characteristics that are very attractive to the partnership and will add to our growth story. That is becoming even more compelling.

Also, pleasing to see the longevity of these growth contracts, with an average tenor of more than 20 years, each is akin to pipeline contracts and therefore, mitigate residual risks. However, funding growth remains a challenge for the partnership and so, we'll now look at that in the following slide.

So looking at slide 10, the progression of times allowing the partnership to build up its debt capacity, simply as a byproduct of debt, that is reducing more quickly than the asset life or the contract life through which those debts are secured by. Further work will be done in 2019 to try and enhance the partnership's debt capacity by refinancing some of the facilities that better matches the asset life or contract life.

In addition to debt capacity, the partnership's unit price has also improved materially since the beginning of the year. Even more pleasing is our observation that some retail volumes seem to have made a comeback. How long this keeps (ph) remains to be seen. Even so, the current common unit price, still has a way to go for this currency to be viable as a funding source for accretive acquisitions. So, while growth prospects for the partnership already exists within the short-term, it's currency to facilitate such growth is still under development.

Let's now turn to page 11 to summarize. So, financial results continue to improve and while we may see a small drop in earnings contribution during 1Q due to off-regas season at Golar Igloo, contract extensions for Golar Igloo, Golar Grand and imminent commencement of Freeze 15-year charter, our 2019 prognosis remains positive. The Golar Group continues to build on its operating excellence with another quarter of unblemished operational record. It is one of the foundations from which long-term contracts have been secured by Golar LNG. And these contracts of compelling growth opportunities for the partnership when this acquisition currency becomes available again.

That ends the presentation. I'd turn now the presentation back to the moderator for a Q&A session.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Your first question comes from the line of Jon Chappell from Evercore.

Jonathan Chappell -- Evercore ISI -- Analyst

Thanks. Good afternoon, Brian.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Hi, Jon.

Jonathan Chappell -- Evercore ISI -- Analyst

First one is really simple. On the Grand, is there any way you can kind of provide a magnitude on the increase of the contract extensions? And then also, I mean, I know we'll have to wait and see how other options are treated, but maybe just a broad range of magnitude on the inflationary increases on those, if they were to be exercised?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

I'm afraid I can't, only to say that the increase in rate as a result of the charter exercising their option, materially improves the economics of the initial two-year charter and it almost doubles.

Jonathan Chappell -- Evercore ISI -- Analyst

Okay. That helps. The second one -- and I know this is difficult and we'll do our own analysis on it as well. But given the seasonality of the Igloo, given what's happened in the market with the Mazo, I thought your point that your financial leverage to the volatility of the spot market is pretty minimal at this point. But is there a chance that the coverage ratio falls below 1 in the first quarter?

And then, is there a scenario with the Igloo back online in the second quarter, even if the Mazo is not utilized at all, that it would be below 1 in the second quarter?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

It's difficult to say, simply because we're not through Q1 yet. But us -- one of the things that we did looking at the new level of distribution is use very conservative assumptions. We are within those assumptions today. And if we -- and if the performances of the various vessels within these assumptions remain within the parameters, I don't think that we will go below 1. Saying that, of course, as I said, avoiding any mishaps, off-hires and so on and so forth, then we would expect to be close to above just around the 1 mark.

Jonathan Chappell -- Evercore ISI -- Analyst

Okay. I'll stick to my two. And I appreciate it, Brian. Thank you.

Operator

Thank you. The next question comes from the line of Michael Webber from Wells Fargo.

Michael Webber -- Wells Fargo Securities -- Analyst

Hey. Good morning, Brian. How you doing?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Hi, Mike.

Michael Webber -- Wells Fargo Securities -- Analyst

Hey. So, just to start off with a kind of high-level question around kind of the Golar universe and I kind of got at this in the Golar call, but it's a question for you as well. There -- it looks like some big pieces are set to move around, in terms of the carrier spend in Golar Power. I'm just curious.

It kind of begs the question of GML's position within that structure as this is kind of currently constituted. And I know that sounds a bit like a loaded question. But just in terms of what we're seeing there, including the writedown at the parent, how should we interpret that as it pertains to the next year or two for Golar Partners as is currently positioned within the Golar structure?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Look, I think, clearly, the Golar parent is looking at the various business franchises that it has and trying to find ways to make sure that the valuation of those business franchises are properly reflected in share price. I mean, that's pretty obvious. As far as GMLP's involvement in that, I think, to the extent that it is decided that there is a spin-off of the vessels of the ship, I'm not entirely sort of worried too much about that simply because I think if the currency is there, we've shown that there is already a growing and compelling growth opportunity for the partnership.

And those contracts in respect of Nanook and so on and so forth are actually better in my view, have been particularly as they are very long term in tenor. Of course, it's not lost on us. There are challenges there of the MLP -- on the MLP universe in general. But I think to the extent that we can get through and the hurdles that we see today, not just in Golar Partners but also the MLP universe, the currency comes back, I think there is a fantastic growth opportunity to be had.

Michael Webber -- Wells Fargo Securities -- Analyst

Okay. No, that's helpful. And I know that's kind of a tough question to answer today. And I appreciate you've taken a swing at it. The -- just to kind of piggyback on the earlier question on the Igloo, that's a particularly large chunk of cash flow. I know you've got the one-year extension and I believe was flat.

Is it -- what's the right timetable for us to think about in terms of a more permanent solution there, be it an open-tender or long-term extension? I think last year we kind of went up until the deadline, which kind of triggered an extension. Is that -- is there a similar scenario on the table or is that even contractually available? Or do you think you'd find a long-term solution before that?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Well, I mean, I think, to the extent that we are not looking beyond the one-year extension with the same charter. We are already in the back -- and we're already looking at other opportunities for the Igloo. I think the challenge is going to be that -- well, as you rightly say, there was an intention about a charter to go to tender last time. I think the timing of that tender didn't go according to plan. And so as a result, it became a bilateral discussion between us and them. Clearly, they have that time in their hand at the moment.

So, there is an expectation from ourselves that they will go to tender and we will participate in that tender. But at the same time, we can't just limit our participation to that. We are looking at various opportunities as well.

And there are few, and those opportunities are actually more of a long-dated than a potential extension on the current charterers' intention to tender.

Michael Webber -- Wells Fargo Securities -- Analyst

Got you. Is there any visibility to a timetable for that yet?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

No, I mean, it is very much driven by KNPC. I'm sure that this is right in their minds and when they're ready, they'll make it public.

Michael Webber -- Wells Fargo Securities -- Analyst

Okay. All right. I appreciate the time. Thanks.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Sure.

Operator

The next question comes from the line of Fotis Giannakoulis from Morgan Stanley.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Yes. Hi, Brian. Thank you. Brian, I wanted to ask you about the potential growth projects that you mentioned. You mentioned the difficulty in financing these projects. I'm wondering if there have been any discussions of Golar providing any sort of financing that will allow you to do these acquisitions. And also, what is the status of the refinancing of the loan of the Hilli, that will increase the free cash flow from this project?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Hi, Fotis. So, on the first question, absolutely. I mean that discussion exists. But as you can appreciate, at the same time, we need -- as we see both equity and debt capacity improving. So, that is available to us, but that's more of a short-term measure.

And then on the second point on the refinancing, that's still in our cards. It's a big number to manage. And of course, one of the bigger factors in making sure that that's done properly is to include a portion of the Hilli in there. And the discussion with the lenders is ongoing, but at the same time, we can't really push too much, particularly if the market that we are trying to tap for this refinancing isn't as buoyant as we are hoping to. But that's certainly in the cards for 2019 execution.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

And regarding the assets, the older assets that you have, the shipping assets, how do you view these assets in your balance sheet, given the fact that the GMLP was originally structured as a company that will have assets with long-term cash flows? Are there any opportunities that these assets will be redeployed under long-term contracts. I understand that you have a very close relationship with New Fortress Energy and they have been looking at -- they have declared that they are looking for FX (ph) use for their projects. Is this something that you would -- that there are high expectations or could you potentially dispose these assets completely?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

I think it's a good point, you mentioned the relationship between Golar and NFE, I think, clearly, that -- the Golar Freeze is a second asset that we have deployed with them. I think, there is clearly an ambition on NFE to grow within the Caribbean. And discussions along those lines are happening within Golar. I mean -- but we're not just limiting ourselves to that. I mean we -- there are various opportunities for small-scale FSRUs. We're seeing very suitable for the Golar Spirit, for example, while Mazo remains a vessel today for shipping purposes.

She is also first -- a first-rate candidate for another FSRU to enter into very long-term contract. I think the unfortunate thing, of course, is that these contracts, Episeyo, typically take a long time to do. And so while there are opportunities out there that we can pursue, the timing of those opportunities is very difficult to pin down so, which is why one of the reasons I've just been keeping that away from too much discussion on the slides. But clearly in the background, we're working very hard to make sure that these vessels, the shipping vessels are put away in long-term contracts once they have performed.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

But you do not have any plans of disposing any of these. Or you are going to keep them until you find the long-term contracts, is that correct?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

So if -- I mean, clearly, if an opportunity arises and it's a right opportunity, particularly for the vessels that are of an overage (ph), then we will definitely consider it.

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Thank you very much, Brian.

Operator

Thank you. The next question comes from the line of Randy Giveans from Jefferies.

Randall Giveans -- Jefferies -- Analyst

Howdy, gentlemen. How are you all?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Hi, Randy.

Randall Giveans -- Jefferies -- Analyst

Hey. So, two quick questions here. I guess, first, it looks like you've repurchased about $4.5 million worth of common units in 4Q '18. Is there about $10 million or so remaining in that authorization? And then, when does that expire? And any more kind of plans for further unit repurchases or kind of holding off on that for now?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

So the approval we have is actually up to $50 million. And so, we've used up a small fraction of that to date. I mean, in fact, the strategy to do some of the buyback in December has worked out pretty well, to the extent that we -- those units are now, if you want in the money so to speak. But we've just got to see what opportunities there are. It's not an ingrain opportunity within ourselves to keep doing that. But if you're -- if it's the right price, then we'll continue doing it. But as I said, the share price, the unit price has improved somewhat. Hopefully, it maintains that way. And if it improves furthermore, then we do have a currency to use.

Randall Giveans -- Jefferies -- Analyst

Sure. Okay. And then with that, looking at the kind of distribution coverage ratio, I guess, is at 1.2 times in 4Q '18, probably a similar level in 2019. Previously, you've kind of guided to maybe a target of 1.1 times to 1.2 times. So, thinking about maybe timing and scale of possible distribution increases or movements in the future. I guess, what's more likely, a distribution increase or cut over the next two years?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

So, when we looked at the change in distribution a quarter back, we're looking at a pretty long timeline of at least 2.5 years. So -- and then in those scenarios and into the fairly conservative assumptions, we needn't have to do anything on the distribution. So from that perspective, I think that distribution is we are looking at distributions isn't necessary. Clearly, what is more important to us is making sure that we do have a currency to be able to grow.

There is no point in increasing distribution where we are today under the current levels of the coverage until such time as we are able to plug some of the recontracting risks that will come in a few years' time. I mean, I think the priority has got to be, get a currency in place, have a look at the pretty long-term tenor available that is coming and replay, and get rid of the residual risk and recontracting risk that happens in a few years' time.

Randall Giveans -- Jefferies -- Analyst

Sure. All right. Well, that's it for me. I'll pass it on. Thanks, again.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Thanks, Randy.

Operator

Thank you. We have no further questions, sir, if you wish to continue.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Thank you, moderator. And just to thank, everyone, for their participation today and we look forward to seeing you again in the next quarter. Thank you and goodbye.

Operator

Thank you. Ladies and gentlemen, that does conclude your call for today. Thank you all for participating. You may now disconnect.

Duration: 26 minutes

Call participants:

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Jonathan Chappell -- Evercore ISI -- Analyst

Michael Webber -- Wells Fargo Securities -- Analyst

Fotis Giannakoulis -- Morgan Stanley -- Analyst

Randall Giveans -- Jefferies -- Analyst

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