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Golar LNG Partners LP (NASDAQ:GMLP)
Q2 2019 Earnings Call
Aug 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Golar LNG Partners Q2 2019 Results Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there'll be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to your speaker today, Brian Tienzo. Please go ahead.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Thank you, moderator. Good afternoon and good morning to all of you. Welcome to Golar Partners 2Q, 2019 results presentation. My name is Brian Tienzo. I am joined here by our head of Investor Relations, Stuart Buchanan. Without further delay [Phonetic], I'd like to start the presentation and I would urge participants to read through Page 2, our forward-looking statements in their own time. And so with that done, let's jump over to Slide 3 for the main highlights.

With full quarter contributions from Golar Igloo and Golar Freeze, we report increased operating income of $36.2 million for the second quarter of 2019 as compared to first quarter operating income of $25.9 million. And this result does not however include our interest in the operating result of Hilli Episeyo. During the quarter, charters of Golar Grand declared their option to extend his employment for another year at an increased rate. As a result of the foregoing, the partnership achieved a distribution coverage ratio of approximately 1.12x and declared a unit distribution of $0.4042 [Phonetic] for the quarter.

The partnership also took the opportunity to initiate a common unit buyback by taking back approximately $1.5 million worth of units. More recently, and as expected, charters of Golar Igloo issued a tender process for FSRU for a two-year firm employment plus one-year option period. And we will, of course, bid into that competitively.

On that note, let's now turn over the page to go through our income statement highlights. Net results for the second quarter was a loss of approximately $5.5 million as compared to a loss of $15 million in the last quarter. And this improvement is mainly due to the following factors. The Golar Igloo was on high throughout the quarter compared to 57 days of no earnings in Q1.

After a successful commissioning period in Q1, Golar Freeze commenced its 15-year employment with NFE and contributed a full quarter's earnings. Golar Maria was also on high for most of the quarter and the vessel is now on firm employment until the end of October. Disappointingly, though Golar Mazo remained on commercial waiting time for the entire quarter, all other vessels within the fleet performed efficiently and without unplanned off-hire [Phonetic]. Earnings were also positively impacted by decrease in both operating and administrative costs. Whilst all of the foregoing points toward a positive net income for the quarter, a decrease in two to five year interest rates created a net non-cash interest rate swap loss of $23.8 million and resulted into a $5.5 million net loss. One point worthy of note is that the way we're now accounting for Golar Freeze. A modification with the Golar Freeze charter agreement on May 15th resulted to that contract being reassessed under lease accounting rules. From that date onwards, Golar Freeze's contract is accounted for under a finance lease rather than operating lease. Income recognized from the operations of Golar Freeze will it be split into two categories, income that mimics the operating costs of the vessel will still be accounted for as revenue. In the quarter, this amounted to $600,000. However, capital hire revenue will be accounted as interest income. In the amounts that are presented in income statement going forward will be based on a rate implicit in the contract. In the quarter, this amounted to $1.4 million. Of course, this change does not have any impact on cash flow and it also does not change how we arrive at our quarterly distribution coverage.

During the early years of the lease, the difference between Freeze's contribution to income as an operating lease versus finance lease is actually not material.

Turning over to Page 5 for the balance sheet assets, cash and cash equivalents as of the end of the quarter was at $62.1 million. This is lower than previous quarter, mainly due to $14.2 million or hire, which were due by the end of June, but will only receive post a quarter. To augment cash even more, we are now working toward securing a $25 million revolving credit facility. While not immediately required, this will at least give us some flexibility and can be made available to be used for general working capital purposes.

Alternatively, debt buyback, opportunistic buyback of outstanding common units and CapEx programs that could materialize from the various commercial discussions. You will also note from our balance sheet that the vessel under the capital lease line has decreased materially compared to previous quarter. This is also because of the way we haven't changed how we are accountable for Golar Freeze as mentioned in the previous slide, such that Golar Freeze has been de-recognized from vessel and vessels under capital lease line and is now represented in the net investment in leased vessel line.

Going over to Slide 6, balance sheet liabilities. At the end of the quarter, our net debt was $1.57 billion. This includes $439 million associated with Hilli Episeyo. As of the quarter end, the percentage of debt swapped a fixed rate was approximately 98%. The average fixed interest rate of swaps related to bank debt is approximately 2.2% with an average remaining period to maturity of approximately 4.1 years. So, the partnership remains pretty well protected from interest rate variability.

With an improved EBITDA, our net debt annualized EBITDA ratio has improved from last quarter's level of 5.9 times to now 5 times. This is of course a better ratio and we hope to continue to improve in this as we go through the year. Turning over to Slide 7 now, as expected and previously communicated from the last call, distribution coverage ratio for the second quarter improved from 1.01x to 1.12X. Our life-to-date distribution coverage remains at a respectable level of 1.12X.

Looking a little bit ahead with the Golar Grands extended charter and increased freight applying throughout and the Golar Maria hires [Phonetic] around the quarter at a higher rate than those achieved in the second quarter, and of course, assuming all vessels operate as effectively as they did in the second quarter, which we fully expect them to. Then we expect distributable coverage ratio for 3Q to improve further.

Jumping to Slide 8, which highlights the partnership's revenue backlog. As of end of 2Q, this level was at $2.16 billion. The vast majority of the MLP fleet remains contributive to earnings on a long-term basis. Over the partnership's fleet, the Golar Spirit remains the only asset not to contribute to earnings over the past few quarters. Golar Maria's employment has been extended to the end of October, and we're also engaged in long-term charter discussions for the vessel. Similarly was Golar Mazo was idle throughout 2Q, long-term employment discussions are also happening in the background.

Of course, there is no guarantee that such long-term charges will materialize, but the nature of these discussions point toward an improving shipping market. Golar Igloo's firm contract with KNPC ends at the end of the year. KNPC have recently publicly issued tender documents inviting FSRU owners to bid for a two-year firm plus one-year option contract.

As incumbent services provider with existing good relationships with them, will be bidding competitively to secure the contract and to add already a strong revenue backlog.

Turning to Slide 9, which shows the revenue breakdown and the partnership's earnings, equally important to our revenue backlog is the nature and source of that revenue. The graph above highlights the point that the vast majority of revenue are secured by way of long-term contracts. These form the basis of strong financial foundation from which growth can be actually achieved organically or by acquisition. 61.3% of our income is contributed by FSRUs, excluding charter options, these in average contract term of approximately seven years . 32% of our income is from Hilli Episeyo, whose contract runs for another seven years also. And then 6.1% of our income is from shipping and is mostly represented by the long term contract, which Methane Princess is currently servicing. This contract remains in place until 2023. These are being represented without taking account of any potential auction extensions or earnings contributions from ships, not currently in employment. So our ambition is, of course, to improve on this already strong revenue backlog. We have already said that organic growth is possible through the deployment of the Golar Spirit, which, by the way is making good progress visibly of Brazilian opportunity.

Further, there remains various acquisition possibilities available to the MLP in the form of FSRU in a nook for the trains in the [Phonetic] Hilli and in the longer term from FLNG Gimi. However, for these to be viable options, we need to have a more efficient equity currency than what we have today.

So, to summarize then, as most of you will know, opportunities within the world of LNG was plentiful, can be quite slow to develop. Whilst in the face of it, second quarter seems to be a quiet quarter, a hub of activity is actually happening in the background. These activities include progression of commercial discussions to take advantage of an improving shipping market as well as advancement of various FSRU prospects, and we will continue to work hard toward maintaining and growing the partnership.

Nevertheless, in any challenging environment such as that which most MLPs find themselves in today, making sure that day-to-day operations remaining flawless is critical. Our operational team have been achieving this quarter-on-quarter. And with this, as well as strong revenue base and an improving balance sheet position, we have a solid foundation from which we can build our growth. That, ladies and gentlemen, concludes the presentation. I will now turn over the call to our moderator for the Q&A session.

Questions and Answers:

Operator

Thank you, ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] We've already had a few questions coming through, our first one comes from the line of Randy Giveans from the company of Jeffries. Please go ahead.

Randall Giveans -- Jefferies LLC -- Anlayst

Hi, gentlemen. How's it going?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Hi Randy, good. Thank you.

Randall Giveans -- Jefferies LLC -- Anlayst

Oh, I see. Other than the small contribution by the LNG carriers, the only asset with I guess revenue uncertainty for the next few years is the Golar Igloo as you mentioned. So, when does the Igloo have to sign that new two-year extension either with you or with a third party? I know the current contract ends in December. Is it December or it was much sooner than that?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

So what we gather is that the tender process has kicked off. That will continue throughout September. And so the likelihood and expectation of the existing charter is that gets finalized sometime in Q4, obviously before the commencement of that two-year contract, which currently is estimated to be first of March due 2020.

Randall Giveans -- Jefferies LLC -- Anlayst

Perfect. Okay. Now, I guess -- just switching to the distribution coverage, you know, like you said 1.1 plus in 2Q, expect to be higher in the coming quarters. Just trying to think about distribution sustainability. I guess what would cause the distribution to be increased going forward? And then on the other hand, with a 16% yield, I think there's fears of cuts. So what are the chances it gets decreased in the coming quarters?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Well, I mean, it's a good question. I think, clearly we've been pointing toward, you know, some positive progress that we're making in terms of contract security -- securing contracts with the various vessels that we have. But clearly, there is -- the distribution ratio in itself is not without risks. When we set the current level of distribution, we made some prudent assumptions in terms of the earnings capability of the vessels, particularly the ones that are opened. Now, those assumptions remain intact today. But as we have seen over the past six months or so, the shipping market has a way of not necessarily meeting people's expectations. So that is one risks that, you know, we have looked at and we've built in some security. But clearly, it remains quite a challenging environment to be in. Then that will have a negative impact on the potential distribution going forward.

Randall Giveans -- Jefferies LLC -- Anlayst

Alright. I guess my point on the shipping rates for the LNG carriers don't really add much either way in terms of kind of distributable cash flow. So, for the Igloo, could you sustain the distribution at current levels without winning that tender?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

So, for the Igloo we have assumed that the vessel would continue to earn certain amount of earnings, not necessarily sort of an FSRU type level. But clearly you can't have -- you cant' have the Igloo earning anything. Its contribution today is quite meaningful. But we also made sufficient security to not expect necessarily the same level of earnings that it's achieving today.

Randall Giveans -- Jefferies LLC -- Anlayst

And still maintaining the distribution?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

And still be able to maintain certain amount of distribution, correct.

Thanks. That's it for me. Thanks so much.

Operator

Thank you. Our next question comes from the line of John Chappell from Evercore. Please ask your question.

John Chappell -- Evercore ISI -- Analyst

Hi, good afternoon, Brian.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Hi, John.

John Chappell -- Evercore ISI -- Analyst

Brian, you said yourself that despite the pipeline, it's hard to envision further growth with the equity trading where it is today, it's hard to kind of see that changing and it almost seems like you're kind of stuck here in this range and maybe a rising market helps that. But, you know, kind of given what you just mentioned about how the shipping market always kind of disappoints, what's the strategy going forward if the cost of capital remains prohibited from doing drop downs or anything else? I mean, you mentioned that the Mazo's in one lay up, do you start disposing assets, do you think about one in the company down? Well, let's start with that. I mean, how do you kind of think of if you're stuck in the mid-teens yield and you can't grow anymore? What are the next steps?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Yes. Thanks, John. I mean, clearly, it's frustrating when you have set dividend to a level which we believe is sustainable. We gave ourselves one year to see how that would create hopefully a positive reaction in terms of the equity value of the company. Initially, it did, but unfortunately, that wasn't sustained. And we faced ourselves with -- I think is actually touching close to 20% yield at the moment, which is why we took the opportunity to start buying back some of our shares. But to your point, clearly, if it remains along those lines, it's very difficult to look at opportunities out there. That would be able to maintain that yield growth. It's not impossible. So two things will have to happen. One, clearly we would continue to be opportunistic and look at share repurchase. We do have some -- some certain limitations there, in terms of cash that is available to us. We have to make sure that we find a right balance between being able to do that, deploying cash outside of servicing potential CapEx program that may occur as a result of securing long-term contracts and, you know, making sure that we use -- we deploy that cash properly.

As far as strategy is concerned, well, unfortunately, to the extent that the yield continues to be where it is, the best that you could potentially do is continue to look at the buybacks, that is the most useful way of utilizing the cash.

John Chappell -- Evercore ISI -- Analyst

And to the extent they are like demands or [Phonetic]-- I mean, I get that you'll never make what you should on the spirit vis-a-vis what it could actually generate if it did get an FSRU project, but there's not really any V here but what you sell off -- maybe some of the older assets that have been in there for a period of time and maybe don't have a real feasible path toward a long-term project to accelerate the buyback?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Well, I think, the good thing is -- so we haven't completely lost faith in our ability to recontract those. And I think, clearly on the side, while it's looking like -- it's taking a long time to secure long-term employment for those vessels. There is actually quite good progress being made, particularly for the Golar Spirit. And it's actually similar even on the Mazo as well.

And of course, we would only consider that in the long-term, it looks that it is not an impossible, we're putting them into long-term contracts, but we're quite far away from that at the moment. There is -- for each of those opportunities you mentioned just now, there is a potential for us to perhaps spend a little bit of money for -- to get them to a position where they are in the service of those long-term contracts, which is why we're trying to position ourselves as best as we can by having this discussion -- $25 million revolving credit facility to be able to meet those capital requirements in the event that they arrive.

But we're not quite there yet in terms of sort of obliging to start looking at getting rid of those assets.

John Chappell -- Evercore ISI -- Analyst

Okay. That's all I have. Thanks for your thoughts.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Thanks, John.

Operator

Thank you. And we've got one more question coming through from the line of Ben Nolan from Stifel. Please ask your question.

Frank Galante -- Stifel -- Analyst

Yes. Hi, this is Frank Galante on for Ben. To kind of follow-up on John's question in terms of strategy for the partnership should yield kind of not compress, is there discussions or talks about potentially rolling up the partnership into the parent?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Well, I think this is something that we've discussed previously. We are looking at a variety of strategies that would allow in some way making that equity currency more efficient for the MLP. I think currently where we are today, as I said, we gave ourselves at least a year to try and see where the level of distribution would take us, the new level of the distribution would take us. We're not quite there yet in terms of giving up on that. But clearly, there comes a point in time when we have to look at other strategies that would make that -- make the MLP be more of a currency for GLNG again. We'll have to look at various strategies. Roll out is a possibility. We are seeing a lot of activities in the MLP space where that the GPS is rolled back out the MLP, a certain amount of consolidation that could be had potentially making good use of longer term contracts FSRUs within the fleet. But as I said, I think we need to give the remaining time we have on GMLP to see and make a strategic decision before we go ahead and jump into other boxes.

Frank Galante -- Stifel -- Analyst

Okay, that makes sense. And thanks for that. And then going back to the Golar Spirit and Igloo, the two of us are used [Phonetic] a little bit a question mark. You mentioned on the Golar Spirit, there's some good optionality. Is that just the Brazilian projects that the parent are working on or are there other potential contracts for that. And secondly, the Igloo, if it doesn't -- we're not able to be recharted. Are there potential opportunities for other -- those two vessels?

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Sure. Taking those in turn on the Golar Spirit, I mean, we talk about Golar Brazil, simply because that's the most progressed. But always where we've been looking at opportunities in Europe as well as Asia, but we are more prominent talking about Brazil simply because that's where we can ride in the back of good work, the Golar Power has been doing in Brazil as part of the widening portfolio. And of course, let's not forget, in arriving at the level of distribution we have today, we have completely discounted any earnings from Golar Spirit. So, you know, to the extent we're able to secure earnings for the Golar Spirit is actually a huge positive both to general peace [Phonetic] earnings into the distribution coverage ratio.

As for the Igloo, as I mentioned earlier, I think when we set the dividend level to where it is today, we took a prudent approach as to what it could possibly end up earning post its KNPC charter. And we said that while, OK, there may be a possibility that we are able to redeploy the Golar Igloo in a shipping space, because -- particularly as the shipping market is looking to improve now. And so, that's one possibility. But what is sure is that as we join in the bidding process for securing those two-year contract with one-year option, the assumption we've put in the earnings for the Igloo suggests that we can be very competitive in the way we approach that bidding process.

Frank Galante -- Stifel -- Analyst

Okay. That makes a lot of sense. Thanks. That's all I have.

Operator

Thank you. There are no further questions at this time.

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

That's great. Thank you, everyone, for your participation. And yeah, see you next quarter.

Operator

[Operator Closing Remarks]

Duration: 24 minutes

Call participants:

Brian Tienzo -- Chief Executive Officer and Chief Financial Officer

Randall Giveans -- Jefferies LLC -- Anlayst

John Chappell -- Evercore ISI -- Analyst

Frank Galante -- Stifel -- Analyst

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