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Hoegh LNG Partners LP (NYSE:HMLP)
Q1 2019 Earnings Call
May 29, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Hoegh LNG Partners First Quarter 2019 Earnings Presentation. All participants will be in listen only mode. (Operator Instructions) 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 Steffen Foreid, CEO and CFO of the Partnership. Please go ahead, sir.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you, Cole. Good morning, ladies and gentlemen, and welcome to Hoegh LNG Partners earning call for the first quarter 2019. For your convenience this webcast and presentation are available on our website. Now before we start please take a note of the forward-looking statements on Page 2, and a glossary on Page 3.

Now turning to Page 4, I'm pleased to report another strong quarter for the Partnership. The total revenues of $36.1 million limited partners' interest in net income of $10.7 million and a segment EBITDA of $36.1 million. Based on its good performance and financial position, the Partnership distributed $0.44, per common unit during the quarter equivalent to an annualized distribution of $1.76 per unit.

Now turning to Page 5, we are putting (ph) more numbers to the quarter. And reported numbers in this quarter are positively impacted by a 100% availability of the fleets compared to 10 days of scheduled maintenance of fire in the same quarter last year. As already mentioned revenues were $36.1 million in the quarter, up $1.3 million from the first quarter last year. Adjusting for unrealized gains and losses on derivative instruments in joint venture companies, the operating income was $25.2 million and limited partners' interest in adjusted net income was $13.3 million in the quarter, which is up $1.4 million and $1.5 million from the same quarter last year respectively. Based on the distribution of $0.44 per unit, the coverage ratio reached 1.26 times in the quarter, however, it's worth mentioning that the cash flow in the quarter included $1.4 million of proceeds from the settlement of derivatives in relation to the refinancing of Hoegh Gallant and Hoegh Grace which is a non-recurring item.

Turning to Page 6, we're showing the development in key measures over time. Throughout the year, consistency stands out across all key figures explained by the stable and predictable cash flow generated by the Partnership. With the distribution coverage reaching 1.26 times for the quarter, the ratio has been exceeding 1.15 times for 6 consecutive quarters underpinning the Partnership well supported distribution.

Now turning to Page 7, we are showing the income statement in more detail. There are no large variances in operating and administrative expenses quarter-on-quarter. However, the movement in equity in earnings of joint venture standout explained by the impact from unrealized gains and losses on derivative instruments. Going further down the income statement preferred unitholders interest in net income for the quarter was $3.3 million, up $700,000 (ph) from the same quarter last year due to additional units issued under the ATM program. Regarding the ATM program the Partnership raised approximately $2.2 million in net proceeds during April and May 2019, issuing both common and preferred units and taking the total net proceeds to $45 million at the start of the program.

Turning to Page 8, the balance sheet has not changed much since year-end 2018. I would just like to highlight that long-term interest bearing debt increased by $5 million to $395 million at the end of the quarter, reflecting the increased leverage in connection with the refinancing of Hoegh Gallant and Hoegh Grace. Growing under the revolving credit facility provided by the sponsors to the $39 million at the end of the quarter, equivalent to the amount outstanding at year-end 2018. Available drawing and the two revolving credit facilities available to the Partnership was $108 million at the end of the quarter.

Turning to Page 9, we present the Partnership's platform of modern, high-quality assets with an average remaining contract length of more than 10 years. Neptune is still operating in FSRU mode in Turkey expected to start in LNG Carrier mode from the end of June this year in worldwide trade and with time charter (inaudible). Cape Ann is currently operating in LNG Carrier mode and expected to start FSRU operation in India during the second half of 2019 and their sub-charter from (inaudible) to H-Energy. PGN FSRU Lampung and Hoegh Grace continues to operate in out of Indonesia and Colombia respectively, while Hoegh Gallant is operating in LNG Carrier mode under sub-charter from Hoegh LNG to (inaudible) shipping. As already mentioned all units operating according to contract during the quarter. It's worth mentioning that during the second quarter of 2019, Hoegh Gallant will have a dry docking, while PGN FSRU Lampung will complete a class renewal survey on sites. Expenses relating to these activities will be covered by the Partnership, and in addition the units will be of 5 (ph) during the procedure, which is expected to last for 14 days to 16 days in total.

Turning to Page 10, these slides, slides updates the picture at the sponsor level. As you can see all FSRUs on the waterhead employment operating in FSRU or LNG Carrier mode. FSRU number 10, which is expected to be delivered during the third quarter of 2019 is being marketed in the short to medium-term market as a bridge to -- and to long-term FSRU employment is secured. When it comes to business development activities Hoegh LNG has one exclusivity are being selected as the FSRU provider for 3 potential FSRU projects, 2 of which are located in Australia and 1 in South Asia. All 3 projects are subject to the word of government approvals and/or a final investment decision. However, one of the Australian projects the AIE LNG in Port Kembla -- at Port Kembla in New South Wales recently received government approval and has reported progress on securing off-take agreements. The other Australian project AGL's FSRU project in Crib Point is not depending on off-take agreements and is working on obtaining government approval. The 3 potential FSRU projects have a schedule to start-up of operations in 2020 to 2021 time frame, which fits nicely with expiry of the employment contracts in place for the FSRUs intended for these projects.

Now turning to Page 11, we are showing the development in global LNG trade, historically, which is driving the demand for FSRUs as the preferred way of opening up new markets to the supply of LNG. So as you can see from this graph, the global LNG trade has increased consistently year-on-year, responding positively to the increased supply, the competitive pricing of LNG, but also driven by environmental arguments. For the first quarter of 2019, the LNG trade reached almost 90 million tons, which is up 12% through the same period last year. China and Europe are the main drivers of this volume growth, while South Korea and Japan have scaled back relative to the same period last year. While the ongoing trade war between the US and China might impact where US exports are going, it's not expected to impact China's demand for natural gas as its strategy of improving air quality.

Now turning to Page 12, on the LNG supply side, which is driving Global LNG trade and ultimately FSRU demands. We are showing a graph forecasting LNG production through 2025. And from this you can see that the LNG supply is expected to continue growing, increasing by 50% (ph) to 485 million tons in 2025, which is equivalent to an annual growth rate of just over 6%. It's worth mentioning in this respect that most of this growth is expected to come from capacity ramping up are under construction, our projects recently sanctioned and is therefore not dependent on final investment decisions. North America along with Australia, Russia and East Africa expected to provide most of the incremental supply with Qatar also playing a dominant role in this picture.

Now turning to Page 13, on the demand side. We are showing a graph forecasting the development in the Global Energy mix through 2014 -- sorry, 2040. The key takeaway from this graph is that natural gas and renewables are expected to make up an increasing share of the global energy consumption, expense of coal and oil projects. In this picture, natural gas is forecasted to comprise more than one-fourth of the energy mix by 2040. This particular graph is based on information from IEA, but you will see an equivalent picture from other sources describing a development that has been ongoing for some time in particular in Asia, when natural gas increasingly has been seen as a tool for reducing greenhouse gas emissions.

With this backdrop, I would like to direct to Page 15, and -- sorry, 14, and the summary. I would like to highlight the stable and predictable cash flows of the Partnership, and the strong outlook in the FSRU market driven by strong LNG supply and demand dynamics.

And with that, that concludes the presentation. I would like to open up for question from the audience.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question today comes from Chris Wetherbee with Citigroup. Please go ahead.

James Monigan -- Citigroup -- Analyst

Good morning. James on for Chris. Wanted to touch on the drop-down pipeline and get a sense of when the next drop-down might occur? And if you're thinking that it was more likely to be a new build or something from the existing fleet.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Hi, Chris. I think, yeah, again the dynamics for drop-downs is that the sponsor secures long-term employment and when that is secured we have an asset that can be drop-down. As I explained on the business development side there is good progress being made, for potential projects with commercial start up in the 2020 to 2021 time frame. Now, I think, we could be in a position where we could drop-down assets of one final investment decision for a long-term contract may be in combination with an interim contract. We don't necessarily have to wait until commercial start up of a long-term FSRU contract, which has been the case earlier, but at least we need to have our final investment decision in place. And as to the assets themselves, it would be one of the existing fleet vessels at the parent level, the Giant, Esperanza, Gannet and Number 10, which then would be the relevant drop-down candidates.

James Monigan -- Citigroup -- Analyst

Thank you. And then I actually wanted to touch on the Slide 10, which you referenced. I wanted to get a sense of the negotiations in terms of the long-term business development for the Esperanza given that the contract runs through 2021. Just want to get a sense of what an extension might look like or what sort of the current thinking around that vessel might be?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So Esperanza is now operating in China as you know and we are in discussion for extending the contract in China. We also bidding her for other projects. But there is then ongoing discussions regarding an extension, but the terms and details of such discussions is not something that we are available to talk about yet, but there is ongoing discussions. And we also bidding her in for, for other potential projects outside China.

James Monigan -- Citigroup -- Analyst

Got it. Thank you. I'll turn it over.

Operator

(Operator Instructions) And our next question comes from Ben Nolan with Stifel. Please go ahead.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Great. Thank you. So I have a few questions. My first relates to some of the dry docking cost that you call out in the press release or the second quarter. There were a little bit higher, $7 million and $8.5 million relative to the amount of time without service. I was curious, if there was any special outfitting or new equipment or something like that, that might be fitting under the vessels?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah. Hi, Ben. Thanks for the question. And first of all this amount is for both units Gallant and...

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay,

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Right.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Yeah.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

For Gallant, we will do dry docking and for Lampung, we will do the survey onsite. So that means we don't have to go to dry docking to do the survey for Lampung. And we have developed procedures enabling us to stay on site. And that's a little bit more expensive. But on the other hand it makes the unit available to the client for a longer period of time. So these are the costs slightly higher for the on site survey, but there are no particular things that needs to be done. And again it relates to some of the cost for both, both the units.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. Now that's very helpful. Appreciate that. And then moving on to sort of the growth strategy. You laid out and just now sort of how you're thinking about possible drop-downs, which is, I appreciate how to do without the contracts to verify? But I was curious. There was not really I don't think ever been any secondhand or third-party acquisitions in the entire FSRU space. Is that something that you think could materialize there being a seller of an FSRU in the market, maybe doing something with the contract that you guys might be interested in looking at?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, I mean that's -- it is part of our strategy to consider that as well. I mean the strategy of the MLP is to acquire assets on long-term contracts from the parent or third-parties. So far it hasn't taken place that might happen in the future. The primary source of growth comes from the parent, Hoegh LNG holdings. Good progress is being made there on the business development side. But that does not refrain us from considering acquisition from third-parties.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Have you ever -- has there ever been an opportunity that where you might have been able to do that. I'm just curious whether that's something that is realistic to consider or probably not?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, it's not something that we have actively pursued so far. Not to say that there hasn't been opportunities, but it's not something that we have actively pursued so far.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. And so more than likely the realistic means to the next drop is still going to be through a drop-down from the parent is the way that we should think about.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah, I mean, that is the primary source of growth from the sponsor. But it doesn't refrain the MLP from considering third-party exhibition at the same time and that's part of the strategy.

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. All right, I appreciate it. Thanks.

Operator

(Operator Instructions) And our next question comes from Liam Burke with B. Riley FBR. Please go ahead.

Liam Burke -- B. Riley FBR -- Analyst

Yes, thank you. Good morning.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Good morning.

Liam Burke -- B. Riley FBR -- Analyst

You talked about the coverage on the long-term contracts and the pipeline on the drop-downs from your sponsor. Taking a look on the other side of the equation on the overall demand for FSUs -- FSRUs even though you are protected on contract. How do you see the competition rolling out over time understanding that production is continuing to increase?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So, I think if we go a little bit back in time, we -- there are 4 large established players in the space that has for some time been increased competition from shipowners stating they want to expand in the segment and some have made a speculative order. I think it's fair to say, though, that as per the outlook for the carrier market has improved. There has been less talk from shipowners. So, I think, while there is oversupply of FSRUs at the moment, we believe and hope that there will be more balance going forward as traditional shipowners focus on, on carrier business rather than FSRUs. So -- so I think over time we will see a balance in the supply demand of FSRUs. And we don't expect that the universe of FSRU providers will increase considerably.

Liam Burke -- B. Riley FBR -- Analyst

Great. Thank you.

Operator

And our next question comes from Mark Tolentino (ph) with Barclays. Please go ahead.

Mark Tolentino -- Barclays -- Analyst

Hi, good morning. In your press release you referenced certain performance warranties related to vessel performance there were not many during the second quarter. Just wonder if you could talk a little bit more about that.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

No. In all our country and units where we're operating according to the contract during the quarter and we had 100% availability of our fleet. And that's also some of the main reason for the increase in revenues that we see from the first quarter 2018. So during the quarter our units were operating according to contract 100%.

Mark Tolentino -- Barclays -- Analyst

Okay.

Operator

(Operator Instructions) And this will conclude our question-and-answer session. I'd like to turn the conference back over to Steffen Foreid for any closing remarks.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, I would then just like to thank everyone for dialing in and listening into the call and for the question. And thank you for today. Thank you.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time and have a nice day.

Duration: 23 minutes

Call participants:

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

James Monigan -- Citigroup -- Analyst

Ben Nolan -- Stifel Nicolaus and Company -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

Mark Tolentino -- Barclays -- Analyst

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