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Hoegh LNG Partners LP  (NYSE:HMLP)
Q4 2018 Earnings Conference Call
Feb. 27, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Hoegh LNG Partners' 4Q '18 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I'd now like to turn the conference over to Steffen Foreid. Please go ahead, sir.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you, Keith. Good morning ladies and gentlemen, and welcome to Hoegh LNG Partners' fourth quarter 2018 earnings call.

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 two and a glossary on page three.

Now turning to Page four. I'm pleased to report another strong quarter for the partnership with total revenues of $37.8 million, Limited Partners' interest in net income of $12.8 million and segment EBITDA of $37.5 million. Based on the strong operating performance and financial position, the partnership distributed $0.44 per common unit during the quarter, which is equivalent to a distribution coverage ratio of 1.25 times and a distribution of $1.76 per unit on an annual basis. I am further pleased to report that the refinancing of Hoegh Gallant and Hoegh Grace announced last quarter has been closed in a subsequent event in January 2019.

Turning to Page five, we are putting numbers to the quarter. The Partnership reported total revenues of $37.7 million in the quarter, which is up from $37.5 million in the fourth quarter last year. The increase is due to other revenue relating to insurance proceeds in the quarter and higher time charter income on Hoegh Gallant, offset by lower time charter income on PGN FSRU Lampung in the quarter compared to the fourth quarter last year. Due to technical issues there was a performance claim for Hoegh Gallant in the quarter, however, this compares to seven days of off-hire for planned maintenance in the fourth quarter last year, resulting in higher income per unit in the quarter.

Operating income was $22.2 million in the quarter, however, adjusting for unrealized gains and losses of derivative instruments in joint ventures, operating income would have been $26.4 million in the quarter, which is up from $26 million in the fourth quarter last year. The improvement is due to higher revenues and lower administrative expenses, partly offset by higher vessel operating expenses in the quarter compared to the fourth quarter last year.

Limited partners' interest in net profit adjusted for all unrealized gains and losses of derivative instruments was $13.8 million in the quarter, this is down from the fourth quarter last year, mainly due to an income tax expense in the quarter compared with an income tax benefit in the fourth quarter last year. The segment EBITDA was $37.4 million in the quarter, this is up $3.7 million from the fourth quarter last year, mainly due to the acquisition of the remaining 49% of Hoegh Grace with effect from December 2017.

Turning to Page six. We're showing the development in key measures over time, where the positive trends and consistencies stands out. Segment EBITDA has been improving over time driven by acquisitions and improved operating performance. Limited partners' interest in adjusted net profit, which excludes unrealized gains and losses on derivative instruments, has also been positive trending, with the fourth quarter 2017 results standing out due to the tax benefit in that quarter.

With a distribution coverage ratio reaching 1.25 times for the quarter, the ratio has been exceeding one-time 15 for five consecutive quarters and improving over time, driven by stable cash flows from operations and reduce debt levels.

Turning to Page six, sorry turning to Page seven, we are showing the income statement in more detail. For the quarter-on-quarter comparison, I would like to highlight the development in vessel operating expenses, which are up, partly due to repair cost for Hoegh Gallant in the quarter.

I would also like to highlight the reduction in administrative expenses, which is explained by activities relating to the acquisition of the remaining 49% interest in Hoegh Grace and offering of preferred units in the fourth quarter last year. The development in earnings of joint ventures is explained by the development in unrealized gains and losses of financial instruments. While the development in income taxes is due to the tax benefit recorded in the fourth quarter last year, as already mentioned.

Finally, I would like to highlight the reduction in financial expenses, which is driven by a positive development in unrealized gains on financial instruments and lower outstanding debt demands. For the full year, I would like to highlight that limited partners' interest in net income was $65.3 million, equivalent in earnings per unit held by the public of $1.93, which compares to distribution per common unit of $1.76.

Turning to Page eight, the balance sheet has not changed much since year-end 2017. One of the larger developments is the reduction in long-term debt of $44 million during the year, which is explained by regular amortization. Another development is the reduction in revolving credit facility due to owners and affiliates of $12 million, repaid mainly with proceeds from the history of units under the ATM program. During the quarter, approximately $4 million of proceeds were raised under the program. However, no units have been issued since the beginning of November 2018.

Turning to Page Nine. And as already mentioned, the Partnership secured commitments for a refinancing of Hoegh Gallant and Hoegh Grace during the third quarter and transaction that was closed in January 2019. The new facility is for an amount of $383 million and comprised $320 million and secured senior secured term loans, which are fully drawn and a revolving credit tranche of up to $63 million, which is undrawn and maybe used for general partnership purposes. The facility has a tenure of seven years and a swapped interest rate of approximately 5%. This facility, the partnership has refinanced at improved terms, enabled a further diversification of banking -- of banks in the group and reduced its reliance on funding from the sponsor.

Turning to Page 10, we present the Partnership's current platform of five modern high-quality assets all on long-term charters with an average remaining contract length of more than 10 years. Neptune continues to operate in FSRU mode in Turkey and is expected to remain at site until mid this year.

Cape Ann is operating in LNG Carrier mode in worldwide trade and we'll continue to do so until the likely commencements of operation in FSRU mode in India this summer.

PGN FSRU Lampung is on location of Lampung in Indonesia and has seen increased regasification activities in the past few months. Hoegh Grace continues to operate as an FSRU in Cartagena, Columbia, providing energy to gas-fired backup power plants.

Finally, Hoegh Gallant is operating in LNG Carrier mode since the departure from Egypt last year, with the Partnership continuing to have a contractual relationships with sponsor relating to the units.

Turning to Page 11, this slide updates the picture at the sponsor level and as you can see from the overview, the sponsor has been successful at putting its new built FSRUs to work on medium term contracts. Hoegh Giant is operating under a three-year LNG Carrier contract with Naturgy. Hoegh Esperanza is operating under a three-year combined FSRU and LNG Carrier mode with CNOOC and Hoegh Gannet is operating under a 15 months LNG Carrier contract in Naturgy.

In addition, the sponsor has been selected as the FSRU provider for AGL's proposed LNG input project in Crib Point in Australia for a project that is estimated to generate an annual EBITDA of around $30 million. The sponsor has further achieved exclusivity and is in the final round of additional projects, all with the schedule start up in 2020-21.

Turning to Page 12. We are showing the development in global LNG supply and demand historically and projected, as prepared by IHS Markit. From this, you will see that global LNG production is expected to increase from approximately 320 million tons in 2018, to approximately 550 million tons in 2030. Of this increase approximately 100 million tons are estimated to confirm capacity under construction and this includes projects such Prelude, Corpus Christi, Cameron and Freeport. The rest is expected to come from proposed new capacity.

And in this respect, the impacts on final investment decisions for new LNG production facility seems to have ended. In 2018, LNG Canada's project was sanctioned. Qatar Petroleum and ExxonMobil have further advanced at Golden Pass LNG project in the US Gulf Coast. And in addition, Qatar Petroleum seems to be moving ahead with its announced expansion of existing facilities. Worth noticing is that recent final investment decision are backed by shareholders with volumes to be sold off-takers at a later stage.

Turning to Page 13. We are highlighting some statistics showing that 2018 seems to be a turning year for the LNG and the FSRU market. Global trade in LNG increased almost 10% to 320 million tons in 2018. 19 million tons of new production capacity was sanctioned, including LNG Canada's 40 million tons already mentioned. Within the LNG carrier segment, the average day rate almost doubled to $85,000 per day and in the FSRU segment, six new contract awards were made, of which two went to the sponsor.

Now turning to Page 14. Drivers of FSRU demand is typically replacement of coal and oil in power and industrial production, diversification of energy supply sources and seasonal demand. While the Middle East, Pakistan and Latin America are the regions importing most LNG through FSRUs today. New FSRU project opportunities are spread across the world, South Asia, Asia and Oceania represents the most prospects, followed by South America, Europe and the Middle East North Africa. While the FSRU market remains competitive, it's worth mentioning that the recovery of the LNG market has led traditional ship owners to focus more on this segment and less on the FSRU segment, which is to the benefit of our sponsor, when bidding for new business.

So, turning to Page 15. I would then like to turn to this page just for a summary of an MLP investment propositions, which concludes the presentation for the today. And with that, I would like to open up to questions from participants.

Questions and Answers:

Operator

Yes, thank you. We will now begin the question-and-answer session, (Operator Instructions) And the first question comes from Chris Wetherbee with Citi Group.

Christian Wetherbee -- Citi Group -- Analyst

Hi, thanks for taking my call this morning, appreciate it. I want to start with a question about the Gallant, and just wanted to get a sense operationally, what happened in the fourth quarter, and from a cost perspective, do you expect any of that cost that impacted the fourth quarter to linger into the first half of 2019?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Hi, Chris. There was an issue with the electrical equipment board, which meant that we had to deviate from the planned route and had some additional costs. And those costs are covered in the fourth quarter and we don't expect any additional costs to come in 2019 relating to that matter.

Christian Wetherbee -- Citi Group -- Analyst

Okay, that's helpful, appreciate it. Wanted to also ask about the potential for the AGL contract, and how do you think about the assets, the assets to deploy onto that business? Is it the call number 10, or do we have one of the other FSRU that's currently in trading mode that might be able to be shifted there? How do you think about the asset deployed for that potential business?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah, so the decision for which asset to use, there is still to be decided upon, but there will be one of the existing assets. And we hope that a final investment decision and these basic contracts are still subject to CPs and we hope them to be lifted during the year with the start-up 10 of the projects in 2021. So, the parent will the responsible use of one of the existing units for that project, but it remains to be decided, which one.

Christian Wetherbee -- Citi Group -- Analyst

Okay. Okay, that's helpful. And then I guess just maybe more broadly taking a step back and thinking about the fleet in general. As you look at supply demand of FSRUs build over the course of the next couple of years, do you have sort of the target date, when you'd like to have the assets are current -- currently trading as carriers, transitioned back into sort of full FSRU deployment. I'm trying to get a sense of maybe, how you think about this a couple of years out, if you still think that you'll need to have vessels trading, as opposed to actually operating in and sort of true FSRU employment?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah. So, that again that question goes in relation to the sponsor. And if we look at the fleet of the sponsor, you have Giant, Esperanza, Gannet and FSRU#10, which then are potential dropdown candidates. And Giant, Esperanza, and Gannet, they are on medium term contracts, expiring in 2020-21 and that means that they go off their current interim contract in a timely manner to be able to start off on the FSRU project that we currently are bidding on. Because the FSRU projects that we currently are bidding on, they have a start-up in the 2020-21 period, which is when the units of this sponsor go off their interim contracts. And the plan is then for them to, you know, go from the interim medium term contracts and on to long-term FSRU contracts, and then we dropdown to -- offered for dropdown to the MLP.

Christian Wetherbee -- Citi Group -- Analyst

Okay. Okay, that's helpful. In terms of the timing there, last question, just on distribution and coverage ratio for 2019. Can you give us a sense of the coverage ratio has been rising here, what you think the appropriate one is, and how do you think about in the context of distribution increases?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

I think what we normally have done is to consider a distribution increases in connection with dropdowns, and I don't think we should deviate from that. That's the next point in time, when we will consider changing distributions. We reached 125 times this quarter, that's a high number. It might not be the same level next quarter. But if you see the, the history, we have been above 1.15 now for five consecutive quarters and that's what were you normally would expect to see us going forward.

Christian Wetherbee -- Citi Group -- Analyst

Okay. So, we will wait for the dropdown. All right. Thank you very much for the time. I appreciate it. Thank you.

Operator

Thank you. And the next question comes from Donald McLee with Berenberg.

Donald McLee -- Berenberg -- Analyst

Good morning. Just to start things off, could you talk a bit about the of boil-off claim for the JV, is it better, and then that's isolated to the 2018 results? Or could there potentially be a cash payment that comes due in 2019 to settle the claim?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So, the boil-off claim, it's the joint venture companies that is subject to that. But the joint venture companies and the partnership, they have been indemnified by the sponsor. So, it's the risk carries at the sponsor level, not the MLP level. We have made a provision there and if that should come to a payout under the boil-off claim, the partnership is indemnified from its sponsor relating to that.

Donald McLee -- Berenberg -- Analyst

Okay, thanks for clearing that up. And then just following up on Chris' question on the distribution. We do have some debt maturities coming due in 2020, even though you've kind of picked up your distribution coverage to that 1.2 times level. You also have some drydocking that's probably going to impact that coverage in 2019. So, if you look to 2020, as kind of the earliest point, where distribution hike could have in, how should we -- how are you guys think about prioritizing distribution growth in 2020 versus the getting that the upcoming maturity refinanced?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

I think if you look at the debt we have, that's amortizing, it always is. So, -- and it's amortizing relative with the pace of between 12 years and 18 years normally. When we refinanced Gallant in Greece, we were able to releverage because that you have had reached down to a relatively low -- low to value on the existing debt. So, I think we will -- when we come to refinancing, we hope to be able to maintain the regular distribution, I believe we will and we will always pursue a prudent distribution policy.

Donald McLee -- Berenberg -- Analyst

Okay. And then just one more, in terms of maybe growth priorities. How do you think about facilitating an additional dropdown from the parent level, versus acquiring some of the unknown interest in the assets that are actually in your fleet?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So, I think, when it comes to acquire, the making acquires from the parent is, were expect to be done in connection with the sponsor securing long-term contract and going on contract on long-term FSRU contract.

When it comes to acquiring, increasing the ownership in the existing assets, I think, that something we have considered. But I think we have to solve the boil-off issue, before we can reconsider that again. So, that was put on hold in connection with the boil-off and will be on hold until that has been resolved.

Donald McLee -- Berenberg -- Analyst

Okay. I appreciate you taking the questions. That's it on my end.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Thank you. And the next question comes from Max Yaras with Morgan Stanley.

Max Yaras -- Morgan Stanley -- Analyst

Hi guys. Thank you. I'd just like to follow up on the AGL project. Is there any kind of view on what duration maybe pricing would be, and then, what is the potential for that, whatever FSRU is selected for that to be dropped down?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

The AGL?

Max Yaras -- Morgan Stanley -- Analyst

Yes, yes.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah. So, the AGL is, we expect that there will be CPs were lifted during the year and with the start-up in 2020-21, the contract is expected to generate around US$30 million in EBITDA. And it's a long-term contract that will fit well into the partnerships portfolio. So, I think once, you know, CPs has been lifted and we are closer to commercial start-up that's when there will be a dialog between the sponsor and the Partnership for the dropdown of that. But I do expect that to be maybe the next dropdown candidate, but it's certainly a relevant one.

Max Yaras -- Morgan Stanley -- Analyst

Okay. And then I believe you guys are looking at another Australia project. Do you have any updates on that, or how close is the FID?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

That's right. So, we have also been -- the sponsor has been selected preferred supplier for another the AIE project in Australia. So, that project is also subject to CPs, they are pursuing environmental permits, and they also pursuing commercial offtake agreements. So, that's a project that is material -- is progressing in parallel with AGL. But it's too early to say anything about the likely outcome of that process, and when potentially that could be a final award for that project. But it is one of the two more realistic or relevant projects in Australia, from our point of view.

Max Yaras -- Morgan Stanley -- Analyst

Okay. And then I'm just wondering, if you could give a little bit of color, as the current market rates, obviously we see LNG carrier rates come down in the past couple of months. But how is that affect maybe in near term FSRU rates and then longer term charter rates?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

I think, yes, in the carrier market, the rates have come down recently, but still compared to last year, they are up on average. So, '18 compared to '19 -- '17. And I think the positive development in the, the carrier market has led traditional ship owners to focus more on that segment and less on the FSRU segment.

So, I think the biggest benefit from the sponsors perspective and also from the Partnership's perspective relating to the improvement in the carrier market is, is that it will, it has led to less, less competition, and I think that's a positive note on the FSRU rate going forward as such.

Max Yaras -- Morgan Stanley -- Analyst

All right. Thank you so much.

Operator

Thank you. (Operator Instructions) And the next question comes from Gregory Lewis with BTIG.

Gregory Lewis -- BTIG -- Analyst

Yes, thank you, and good afternoon. You know this is, as we look at the developments in the FSRU market, it clearly looks like there is some potential opportunities out there over the next couple of years. Just as we think about that, like how should we be thinking about these, this pickup in potential FSRU demand in 2021, is that really just these customers need to set these units in place, or as the market as a whole, had to adjust their pricing to entice some of these potential projects?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, I think we have seen a drop in FSRU rates compared to some years back yes, we have, compared to the first FSRU contracts, we were awarded four, five, six years ago. And so I think, and that's, that probably have led to the projects we're looking at now. It's been a catalyst for them to get moving and developing that project further.

So, they are benefiting from a rate reduction we have seen over few years now. But I think we believe we have reached the bottom of the curve and that we hope to see a positive development in FSRU rates going forward. I think the fact that there is more activity on the FSRU segment now is, is more driven by the fact that they need to move forward now in order to be ready for the supply to take onboard, the supply of LNG, when it's coming in 2021.

So, I think that's the main reason for the increased activity is that, they see that LNG is coming and they need to move forward the project in order to be able to meet that time, when the LNG is coming.

Gregory Lewis -- BTIG -- Analyst

Okay. So, it almost sounds like the fourth or fifth FSRU contract will -- most likely have a better return than the first one signed. Is that fair?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, I hope to, we do hope to, we think that we have reached the bottom, yes. And that you should expect to see a positive development hopefully in FSRU rates going forward, to compared to what it is today, yes.

Gregory Lewis -- BTIG -- Analyst

Okay, thank you guys very much for the time. Have a great day.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

Thank you. And as there are no more questions at the present time, I would like to return the floor to Mr. Foreid for any closing comments.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, I would just like to thank everyone for, for dialing in today to Hoegh LNG Partners' fourth quarter earnings call. And if there are any follow-up questions, I welcome everyone to contact us directly. Thank you.

Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Duration: 30 minutes

Call participants:

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Christian Wetherbee -- Citi Group -- Analyst

Donald McLee -- Berenberg -- Analyst

Max Yaras -- Morgan Stanley -- Analyst

Gregory Lewis -- BTIG -- Analyst

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