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Hoegh LNG Partners LPÂ (HMLP)
Q2Â 2019 Earnings Call
Aug 22, 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' Second Quarter 2019 Earnings Conference Call. [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.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Thank you, Cole. Good morning, ladies and gentlemen and welcome to Hoegh LNG Partners' earnings call for the second quarter 2019. For your convenience, the webcast and presentation are available on our website.
Before we start, please take a note of the forward-looking statements on page 2 and a glossary on page 3. Turning to page 4 and the highlights. I'm pleased to report that all units operated according to contract during the quarter. However, planned off-hire and maintenance during the periodic survey of Hoegh Gallant and PGN FSRU Lampung impacted the results for the quarter. Hoegh Gallant was in dry dock during the survey, resulting in 16 days off-hire and this opportunity was used to also perform maintenance on the generators. For units operating in FSRU mode, maintenance on generators normally performed during operations. However, for units operating in LNG carrier mode, like Hoegh Gallant, this is difficult.
The timing of the relevant maintenance procedures were therefore accelerated and performed during the dry docking to reduce the risk of service interruptions in subsequent periods. The periodic survey of PGN FSRU Lampung was performed afloat and the unit was on-hire for the whole period, however some maintenance was also performed on this unit.
Reported numbers are further adversely impacted by unrealized losses on derivative instruments in joint ventures during the quarter. With this backdrop, the partnership reported total revenues of $33.8 million and limited partners' interest in net income of $2.8 million in the quarter. The partnership paid a distribution of $0.44 per common unit during the quarter, equivalent to a distribution of $1.76 per unit on an annualized basis.
Turning to page 5, we are putting more numbers to the quarter. Excluding unrealized losses on derivative instruments and foreign exchange, operating income of $19.9 million and limited partners' interest in adjusted net income of $7.4 million in the quarter were down approximately $6.2 million from the same quarter last year. The reduction is mainly due to the planned off-hire and maintenance already mentioned and a non-recurring revenue recognition of insurance proceeds in the second quarter last year.
Turning to page 6, we are showing the development in key measures over time with the latest quarter standing out as you can see, however, adjusting for the impact of the off-hire and the maintenance during the periodic survey, the quarter would have been in line with the average seen in the previous 12 months. For the next quarter, additional maintenance expenses for PGN FSRU Lampung are expected to incur. And in addition, Neptune will have an on-water class renewal survey. However, the Neptune will remain on-hire during the survey and most of the survey-related expenses are expected to be compensated by the charter.
Turning to page 7, we are showing the income statement in more detail. The reduction in total revenues quarter-on-quarter to $33.7 million [Phonetic] is mainly due to the off-hire of Hoegh Gallant in the quarter, and the non-recurring revenue recognition of insurance proceeds in the second quarter last year. This is partly offset by higher revenues for reimbursable costs or the units in the quarter compared to the second quarter last year. The increase in operating expenses quarter-on-quarter to $9 million is mainly due to the maintenance in the quarter and low procurement activity in the same quarter last year. Of the quarter-on-quarter change, approximately $3 million relate to increased maintenance expenses.
The reduction in equity in earnings of joint ventures to a negative $1.5 million in the quarter is explained by unrealized losses on derivative instruments in the quarter. Excluding this, the equity in earnings of joint ventures would have been $3.1 million in the quarter, an increase of $1 million from the second quarter last year. Going further down the income statement, preferred unitholders' interest in net income for the quarter was $3.3 million. This is up from the same quarter last year due to additional units issued under the ATM program. During the quarter, the partnership raised approximately $2.3 million in net proceeds under the program, issuing both common and preferred units.
Turning to page 8, in the balance sheet, the balance sheet has not changed much since year end 2018 with total liabilities and equity standing at just over $1 billion at the end of the quarter. The only thing I would like to mention is that in addition to $27 million in cash and cash equivalents, the partnership had $105 million in undrawn amounts under the two revolving credit facilities, taking the total liquidity to approximately $132 million at the end of the quarter.
Turning to page 9, we are showing the partnership's platform of five modern assets, which have an average remaining contract length of approximately 10 years. As already mentioned, all units are operating according to contract during the quarter, serving clients at three continents. Neptune left Turkey during the quarter and is now operating as an LNG carrier in worldwide trade under the time charter with Total. Cape Ann is still operating in LNG carrier mode and expected to start FSRU operations in India in the fourth quarter of 2019 under a sub-charter for Total to H-Energy. There are no material changes to the operation of PGN FSRU Lampung, Hoegh Grace, and Hoegh Gallant to be reported.
Turning to page 10 and the status at the sponsor level, Hoegh LNG is scheduled to take delivery of Hoegh Galleon in a few days and will subsequently have five FSRUs and two LNG carriers under water. The four FSRUs that are being marketed for long term FSRU employment all has employment secured until 2020/21, which fits well with the scheduled start-up of targeted FSRU projects.
As already reported, Hoegh LNG has been selected as FSRU provider for AGLs planned FSRU project and the development at Crib Point in the state of Victoria in Australia. The time charter is for a period of 10 years, with an anticipated start-up in the first half of 2022, subject to the project obtaining regulatory and environmental permits and AGL making a final investment decision. The project, which is expected to be serviced by Hoegh Esperanza has offtake secured. Additionally, Hoegh LNG has one exclusivity for two potential projects.
The first is AIE's planned FSRU project at Port Kembla in New South Wales in Australia, which has obtained the necessary environmental permits and signed one offtake agreement for part of their capacity. Subject to AIE making a final investment decision, Hoegh Galleon is expected to service the project from end 2020. The second project for which Hoegh LNG has won exclusivity is a South Asian project, which currently is progressing permits. Hoegh Gallant, which is owned by the partnership is actively being marketed by Hoegh LNG and could be relevant for several of the FSRU projects pursued by the sponsor.
Turning to page 11, we are showing the development of global LNG trade, which continues to grow year-on-year, reaching 88 million tonnes in the quarter. This is up 19% compared with the second quarter last year, with China and Europe driving the demand in the quarter, and Japan scaling back compared to the same quarter last year. It is expected that global LNG trade will continue to grow, as more LNG supplies come in to the market. LNG demand growth is expected to be driven by fuel switching in the industry and power sectors and the need for backup solution supporting wind and solar power production. The Asia Pacific markets are expected to represent the lion's share of global LNG demand growth with China, India, Bangladesh and Pakistan accounting for the largest demand growth. Europe is also expected to see higher LNG demand.
Turning to page 12, we have an illustration to the left, which shows the projected natural gas growth in the energy mix through 2035, both on a global basis and in selected markets, driven by the factors already mentioned. As the illustration shows, China stands out the strong growth market for natural gas and hence LNG since domestic supply of natural gas is limited, followed by India and Europe. This illustration is from Shell, the data from other sources will show an equivalent picture.
On the right hand side, we are illustrating how natural gas is complementing renewable sources of energy in power production. Example is from Spain, the same picture can be extracted from other markets. The blue bars show the wind power production in Spain during a selected month, and the yellow line shows the natural gas power production in the same period. What the illustration shows is that natural gas is used as feedstock in power production to offset variation in the wind power production, therefore ensuring a stable base load of energy production. This is a good example of how natural gas is expected to be part of the long term energy mix, serving as backup for renewable sources of energy.
Turning to page 13, and the supply side, the key takeaway from this slide is that the supply of LNG is expected to increase substantially over the next few years, driven by production capacity already under construction over FIDs has been made. The total supply expected to reach almost 500 million tonnes per year by 2025, there is expected to be ample supply of LNG to meet the expected increase in LNG demand in the years ahead.
Turning to page 14, we have an overview showing the FSRU market potential as Hoegh LNG sees it. Today, there are 24 FSRUs in operation, and six FSRU projects under construction worldwide. In addition, Hoegh LNG has identified more than 30 potential projects medium to long term. This includes active and potential future tender processes. The business activity at the sponsor level has been high this year and several active project opportunities pursued are being backed by solid companies.
With this backdrop, I would like to turn to page 15 and the summary where we'd like to highlight the stable and predictable cash flows of the partnership and the strong outlook of the FSRU sector.
And with that, I would like to open up for questions from the audience.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Chris Wetherbee of Citigroup.
James Monigan -- Citigroup -- Analyst
James Monigan on for Chris. Just wanted to first touch on the vessel opex, you mentioned that there's a $3 million acceleration. How should we think about that going forward? Should it be a bit lower than the about $6 million a year run rating at before or should it basically be that and just that there's less possibility for spikes in the future? Thanks.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Yeah, the maintenance of the engines that was performed during this quarter during the dry dock is expenses that otherwise would have occurred in later periods, if they had not occurred now. It is part of the cycle to perform maintenance of the engines. And for Hoegh Gallant, it was decided to accelerate the procedures during dry docking, for the reason already explained. So this is not additional expenses. This is expenses that otherwise would have occurred in subsequent periods.
James Monigan -- Citigroup -- Analyst
Got it. And then I think you had previously been expecting some off-hire for the PGN. But there wasn't necessarily any in this quarter, will there be any off-hire in 3Q or higher expenses related to some maintenance there.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
We did actually expect some off-hire relating to the periodic survey, but that was not the case. So that periodic survey was performed without any off-hire, but there might be some maintenance expenses, relating to the survey occurring next quarter, but no off-hire relating to the periodic survey.
James Monigan -- Citigroup -- Analyst
Got it. And then also I noticed that depreciation had also stepped up, I wanted to know if that was essentially related to this maintenance of some sort of special item or that's sort of the run rate to think about moving forward.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Well, I think that's the run rate to think about going forward on the depreciation.
James Monigan -- Citigroup -- Analyst
Got it. And then just as a separate question, just wanted to sort of get your updated thinking around the IDRs and any potential review around them or restructuring that you might be considering. Thank you.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Yeah. I mean, we have the IDRs in place, they are currently at the low split and does not represent a big linkage to the sponsor, however, I think we see the trend in the market, and we believe we will have to do something with the IDR structure at one point in time. I don't think we need to do anything now. But we will do it before it becomes an issue. And I think it's not unlikely that we will consider the structure in connection with the next drop down. I think that's a natural point in time to consider the IDR structure.
James Monigan -- Citigroup -- Analyst
So at the next drop down or after that? Just to clarify?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
In connection, I think, at the -- currently, we are at low splits and it's not a problem for the MLP at the moment. But we will address it before it becomes an issue. So, let's say, in connection with the next drop down.
Operator
The next question will come from Ben Nolan of Stifel.
Ben Nolan -- Stifel -- Analyst
Great. Thanks. So I had a couple of questions that I guess are for you guys, or maybe the sponsor, but when thinking through the two Australian projects, obviously they're still conditional and one is expected to hopefully start in '20 or next year, and then the -- other the year after, any sense of when -- do you have any sense of when that -- you'll have a definitive agreement to move forward how soon something like that may be so that those vessels can be firmly put into the pipeline?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Hi, Ben. Well, I think we, the parent reported that progress has been made on these projects during the quarter. And as you say that one of them has an estimated scheduled start-up in 2020 and the other one in 2022. I think it's hard to say exactly when a final investment decision will be made on the project owner side. But I think, we see that project or progress is being made. So -- and I think at that point in time, when the final investment decision is made, and the sponsor has a firm contractor agreement without SEPs [Phonetic], I think at that point in time, we can start considering drop down candidates, we could do it, we could wait until the long term time charter agreements, commence operations or we could consider doing it at an early stage in combination with the interim time charter agreement already in place for the units relevant for those projects. That is difficult for me to say [Phonetic], pardon?
Ben Nolan -- Stifel -- Analyst
So then, theoretically, there could -- one of those could be a dropdown candidate next year, then, I guess, right?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Well, theoretically, yes. If you combine it with the existing medium term employment contract on the unit.
Ben Nolan -- Stifel -- Analyst
Okay. That's very helpful. And then my next question is sort of more market related or just sort of how the FSRU market is developing and clearly, LNG prices have been very low. And while that seems like it should be a motivator for new regasification projects in developing economies or wherever, there hasn't seemed to have been a lot of firm contracts committed even though it's probably more economic than it's ever been. Just curious if your sense is that there's a big wave of projects coming or if maybe low LNG prices just causing slowness and everything?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Well, on the supply side, the additional LNG volumes will be coming into the market. And, so there will be increased volumes. The low prices, we are servicing the buyer of the LNG and they are benefiting from the low prices. So I think, continuously low prices should have a positive impact on the demand for LNG and demand for FSRU services. I think what we have seen is that --
Ben Nolan -- Stifel -- Analyst
That was sort of my point is that it seems like there should never have been a better time to pursue FSRU business than when the price is very low. But so far it hasn't translated into too many contracts, just curious if your senses is that that's about to happen or if it's imminent?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Well, I think we have seen good progress on the projects that we are working on. And I think -- so that's probably an element, or a benefit from the low prices. We see good progress, we have also seen additional potential projects coming to the markets. So I think we would say that we are seeing benefits from the low LNG prices in that, there are progress being made on existing tender processes and also some new tender processes coming to the market. So I think we could say that we are seeing benefits from that.
Ben Nolan -- Stifel -- Analyst
Okay. All right. That's helpful. I appreciate. Thank you.
Operator
The next question will come from Ken Hoexter of Bank of America.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Hi, good morning or good afternoon. So just thinking about the market itself and maybe to follow on Ben's question. Given prices are low now, what are your thoughts on rates, especially as you have a vessel trading in the trading market? What are your thoughts, given this spike -- compared to the spike last year's fourth quarter we saw, do you see anything building with IMO or anything else that's driving or will drive those prices higher as we move into the back half or do you expect to kind of see these weaker rates continue?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Well, are you thinking about LNG carrier right now?
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Yes, on the carrier side? Yeah.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Well, I think that will be a consequence of supply and demand. And I think if you look at the rates we have, the parent, the sponsor has been able to achieve even more recently, they have been able to achieve relatively good rates for medium term contracts. And bear in mind that the sponsor, they are not pursuing spot rates. When they have employed their fleet for, on medium term carrier contracts, that is medium term, a year to year and a half. And that is not driven that much by spot rates to some extent, but the parent that has actually been able to achieve quite healthy rates for medium term employment contracts, despite low spot rates.
So I think it's a little bit, it's not directly exposed to the spot rate since for the medium term employment, they have pursued a year to year and a half contracts. And in any event, the sponsor has, the entire fleet is unemployment and expected to go off the interim employment in 21, 22 around the time when the targeted FSRU projects are expected to start up. So hopefully, they will go from carrier contracts and on to FSRU contracts.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Right? And that's what you were mentioning on like the Gallant, right?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Yeah, Gallant as well. I mean, Gallant is currently on a contract for -- between the partnership and the sponsor, and the sponsor has it on a carrier contract to Gunvor. But that unit is being marketed for long-term FSRU employments.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Okay. And then you mentioned before you're seeing the higher maintenance expense, given the Lampung survey costs and the Neptune downtime. If -- in the future then, if that was pull forward cost, should we see then the opposite, should we see some of those planned operating expenses come back in, given that you pulled forward some or were those higher than expected for other reasons.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
So they were relating predominantly to Hoegh Gallant, which was in dry dock and to some extent, also on PGN FSRU Lampung. And these are costs that if they hadn't occurred this quarter for Hoegh Gallant, they would occur in subsequent quarters. So I think maybe you could say that the operating expense for Hoegh Gallant then going forward would potentially be a little bit lower than what it would have been, if we had not accelerated the maintenance on the engines for this -- in this quarter.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Right. That's what I'm trying to ask is that, should we see then the opex come down over the next few quarters or was that -- is that what you're saying there?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Well, compared to this quarter, definitely.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Yeah.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Yeah. Because this was -- this quarter then included $3 million of opex relating to the maintenance of the engines on Hoegh Gallant, so we did an overhaul of all four engines, which triggered higher operating expenses this quarter.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Okay, maybe let me make it simple then. If this quarter was $3 million higher, does that mean next quarter and the subsequent quarters will each be $1 million lower than the prior run rate or were there extra costs there just absorbed this quarter?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Not $1 million. I don't have the exact number there. But not $1 million lower? No. But I think, maybe around the same level, as you have seen in the past. On Hoegh Gallant, we haven't done the maintenance on the engines in the previous quarter. We did it now to avoid having to do it in the subsequent quarters. So I think on Hoegh Gallant, a continuation of the level of operating expenses that you have seen in the past would be a prudent assumption.
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Wonderful. Thanks for the time. Thanks.
Operator
[Operator Instructions] The next question will come from Liam Burke of B. Riley FBR.
Liam Burke -- B. Riley FBR -- Analyst
Good afternoon, Steffen.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Good afternoon.
Liam Burke -- B. Riley FBR -- Analyst
Steffen, you mentioned earlier in the discussion about how bid activity seems to be pretty steady. On the other side of the equation, on the supply side, are you seeing any change in the competitive activity? It's a fairly tight market with just a few players. But do you see any entrance or any more aggressive activity there?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
On the FSRU supply side?
Liam Burke -- B. Riley FBR -- Analyst
Yes.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
No, I think -- no, we don't see any new players. We have the established operators. And then there are some ship owners that have FSRUs on order on a speculative basis. But we are not seeing any new players in the field. No, we are seeing the players we have seen for some time, we are seeing, but we haven't seen any additional players coming into the market.
Liam Burke -- B. Riley FBR -- Analyst
And the highlight on the macro side, again, the market, there are three reasons why LNG makes a lot of sense for a number of purposes. Projects tend to come online or bids online and offline, are you seeing any more consistency there with interest in the FSRU?
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Yeah. As I said, we have, I think, what we have seen during the quarter and subsequently is that progress -- real progress is being made on the project that we are pursuing. We have also seen some new projects come to the market, tender process coming to the market. So I think we are seeing good activity, both on the existing tender processes and some new coming to the market. So from our perspective, the business development activity is high. And we're seeing also that some of the projects are reporting progress.
Liam Burke -- B. Riley FBR -- Analyst
Thank you, Steffen.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Thank you.
Operator
This concludes our question-and-answer session. I would now like to turn the conference back over to Steffen for any closing remarks.
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
Good, thank you. Well, that concludes the second quarter 2019 earnings call. I would like to thank everyone for participating and wish you a pleasant day. Thank you.
Operator
[Operator Closing Remarks]
Duration: 32 minutes
Call participants:
Steffen Foreid -- Chief Executive Officer and Chief Financial Officer
James Monigan -- Citigroup -- Analyst
Ben Nolan -- Stifel -- Analyst
Ken Hoexter -- Bank of America Merrill Lynch -- Analyst
Liam Burke -- B. Riley FBR -- Analyst
