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Hoegh LNG Partners LP (NYSE:HMLP)
Q3 2019 Earnings Call
Nov 21, 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 Third Quarter 2019 Earnings Conference Call. [Operator Instructions]

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

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you, Carey, good morning ladies and gentlemen, and welcome to Hoegh LNG Partners earning call for the third quarter of 2019. 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 2 and a glossary on Page 3.

Now turning to Page 4 and the highlights, I'm pleased to report that all units in the fleet performed according to contract and at 100% availability in the quarter. This resulted in total revenues of $36.9 million, a segment EBITDA of $36.3 million and a coverage ratio of 1.2 times in the quarter. The Partnership distributed $0.44 per common unit for the quarter equivalent to an annaulized distribution of $1.67 per common unit.

Turning to Page 5, we are putting more numbers to the quarter, excluding unrealized losses on derivative instruments and foreign exchange, segment EBITDA was $36.3 million in the quarter, which is in-line with the same quarter last year, while operating income was $25.6 million in the quarter, which also is in line with the same quarter last year. After the said adjustments, limited partners' interest in adjusted net income was $12.5 million in the quarter, which is down from the same quarter last year, mainly due to higher net financial expense and distributions to preferred unit orders. Based on the distributable cash flow of $18 million and a distribution of $0.44 per common unit, the coverage ratio for the quarter was 1.2 times, which is up from 1.16 times in the same quarter last year.

Turning to Page 6, we are showing the development in key measures over time. And as you can see from the graphs, both the segment EBITDA, adjusted net income and the coverage ratio are back at more normalized levels. As you will recall the previous quarter was adversely impacted by dry docking and maintenance expenses relating to Hoegh Gallant. Periodic survey of FSRUs will have to be done every five to seven years. And this year, both Hoegh Gallant and PGN FSRU Lampung were subject to this at the expense of the Partnership.

Turning to Page 7, we are showing the income statement in more detail. Total revenues of $36.9 million in the quarter is down slightly from the same period last year, mainly due to the recognition of revenues in the third quarter last year relating to the reimbursement of prior period expenses. Vessel operating expenses of $6.6 million in the quarter, it's up from the same period last year mainly due to maintenance expense relating to PGN FSRU Lampung in connection with the periodic survey.

Equity in earnings of joint ventures of 621,000 in the quarter, is impacted by unrealized losses on derivative instruments in the joint ventures compared to unrealized gains in the same period last year. Excluding unrealized gains and losses on derivative instruments, equity in earnings of joint ventures would have been $2.8 million in the quarter, an increase from $1.4 million for the same quarter last year. The improvement is mainly due to lower operating expenses in the quarter. Total financial expense of $7.6 million in the quarter is up from the same quarter last year, mainly due to higher amortization of debt issuance cost and commitment fees in this quarter.

Finally preferred unitholders interest in net income of $3.4 million in the quarter is up from the same quarter last year. Future higher number of preferred units in issue. During the quarter the Partnership raised approximately $8.6 million in net proceeds under the ATM program issuing preferred units only.

Turning to Page 8, the balance sheet has not changed much since year in 2018. The total liabilities and equity is 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 $32 million in cash and cash equivalents, the Partnership had approximately $91 million in undrawn amounts under the two revolving credit facilities at the end of the quarter, taking total liquidity to approximately $123 [Phonetic] million.

Turning to Page 9, we are showing the Partnership's platform of modern assets which have an average remaining contract length of approximately 10 years. As already mentioned, all units operating according to contract during the quarter, it's deriving clients at three continents in FSRU and LNG carrier mode. In regard to Hoegh Gallant, the Partnership will exercise the option to lease the unit back to Hoegh LNG for a period of five years from April 2020, unless alternative long-term employment is available.

As you will recall, the leaseback option was granted the Partnership, in connection with the acquisition of Hoegh Gallant back in 2015, effectively sharing a 10-year employment horizon for the unit at that point in time.

Turning to Page 10, and the business development activity at Hoegh LNG level. As already reported Hoegh LNG has been selected as the FSRU provider and/or is an exclusive negotiation for three potential FSRU projects, two of which are located in Australia and one in South Asia. For the AIE project in Australia, the time charter negotiations between Hoegh LNG and the client is making progress. And in parallel, the client is seeking consent for higher input capacity. Did you increased demand from investors -- from customers, sorry.

For the AGL project in Australia, the agreement between Hoegh LNG and the client has already been signed, and the client is now in the process of seeking the environmental permits for the project. The FSRU project number three mentioned on this slide is located in South Asia and is with an energy major, who is in the process of seeking permits and offtake agreements. All three projects mentioned are subject to final investment decision as mentioned previously. Furthermore Hoegh LNG is involved in official tender processes for two additional long-term FSRU projects of 10 years or more, where the award is expected to take place sometime in 2020. And it's also involved in several other early stage processes around the world.

Turning to Page 11, we are showing the projected development in the energy supply mix through 2015 -- '16, taken from DNVs [Phonetic] report from September this year. The trend in this illustration is clear, namely, a decarbonization of the energy mix which is shown by the substantial growth in renewable sources of energy in the decades ahead. Illustration further shows that the natural gas is expected to play an important role in making the transition happen. And this is important because it represents opportunities for Hoegh LNG and the Partnership.

FSRU solution is a cost efficient way of opening up new markets to the supply of LNG, and thereby facilitating a quicker transition to a more sustainable energy mix. For natural gas, is serving as back-up for renewable sources of energy and certain markets for renewable sources of energy is less available.

Turning to Page 12, and the LNG supply, we are showing that the strong build-outs in new liquefaction capacity continues with record high liquefaction volumes sanctioned so far in 2019, a trend that is expected to continue into next year. This is expected to bring the annual liquefaction capacity up to approximately 470 million tons by 2025, an increase of approximately 48% from 2018. And it's important to remember that this supply growth is coming from capacity that has been decided and it is on the construction. With this backdrop, on the supply side, how is then the LNG demand side reacting.

Turning to Page 13, we are showing the monthly development in global LNG trade. And as you can see the growth in demand continues, year-to-date, the global trade in LNG is up 15% compared to the same period last year of $35 million tons, which is a high number. The interesting part of this development is that, the demand growth from Europe is so strong. Year-to-date, trading to Europe is up 97% compared to the same period last year, equivalent to approximately 31 million tons. Why is that? Well, it's mainly due to the availability of import capacity into Europe, but also because demand from the main Asian markets such as Japan, Taiwan and South Korea has been soft, impacting LNG prices. At the same time, we see continued strong growth from the Chinese market where the growth year-to-date is around 19%, equivalent to approximately 7 million tons. This is less than what we saw last year, but still represents solid growth.

The overall situation in the market is that, it is -- the market is long LNG and prices are therefore expected to remain competitive. This means that demand for LNG from new markets is expected to continue to be strong, driven by environmental and cost arguments which is good for FSRU demand. So how is then FSRU demand looking?

Turning to Page 14, on the left hand side of this slide, we are showing the development in FSRU contract awards, year-by-year over the last decade or so. As you can see the number of awards peaked in 2018 at 10. This is -- this includes projects subject to FID and projects were FSRU negotiations are exclusive. So far this year, there has been three awards. On the right hand side, we have listed the potential FSRU project pipeline by region. As you can see a major portion of this is located in Asia and the Middle East, but mainly in Asia. That is also the region were Hoegh LNG currently is focusing its activities, now with the business development office both in China and Singapore.

The potential project pipeline is based on information from two external sources where Hoegh LNG has removed to mutually exclusive projects. However, it's worth mentioning that the project has varying likelihood of realization and no time constraints [Indecipherable]. Nevertheless, the list of potential FSRU project is substantial.

And with that backdrop, let's turn to Page 15, on the FSRU fleet. At this page, we are showing an overview of the current FSRU fleet and the employment status of this. And as you can see the fleet counts -- 35 units of which 26 are operating under FSRU contracts. The order book comprise eight FSRUs for delivery through 2022, and as far as Hoegh LNG can see five of these committed on long-term FSRU contract. That should lead 12 units that are available for FSRU employment. And with a long list of potential FSRU projects identified, driven by environmental and cost arguments, it's Hoegh LNG skew that FSRUs supply demand situation will balance as new projects make FID. And over time, potentially move into a short position.

And with that, I would like to turn to Page 16, for a summary and open up to -- 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 Citi.

Christian Wetherbee -- Citigroup -- Analyst

Hey, great. Thanks, good morning. I guess, I wanted to start on Slide 10 where you run through some new potential projects there. I guess you have the scheduled start-up dates there, which we appreciate. I guess, could you give us a little bit of sense of maybe the timeline between now and when those scheduled start-ups are expected? To understand maybe what the benchmarks we should be looking for between now and then to get us sort of grow confident that they are beginning to kind of come through and that you guys will be able to potentially participate in those -- I guess, anything that you can kind of help us in terms of realistic timing, is there some point in 2020 that maybe just better indication of how these are developing? That would be very helpful.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah. Hi, Chris, for the AIE project, the scheduled start-up is 2021. That's the official scheduled start-up line by the project. I think this is a project that it already has it permits. But it is in the process of modifying that. And so when that's modified approval is obtained, I guess that's the data point. We also -- this is also a project that, what we are in discussions and formulating the -- with TCP. So when that is completed, that would also be a data point. So I think it's fair to say that, these projects -- it's the progress on the modification of the permit that will be a data point. And also reports from the client on securing the offtake from this project.

For the AGL, the offtake there is secured as such, but there I think the progress in obtaining the environmental impact and statement process will be a data point. We have already signed the TCP there. So this is for -- this if for them being -- for the project to obtain the necessary permits. And I think, you should expect to see good progress on both projects by mid next year sometime. This project has a scheduled start-up and as we state here in 2022.

Christian Wetherbee -- Citigroup -- Analyst

You're right. Okay.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So I think that's the kind of the -- I think the projects also will issue information as they make progress both on the environmental and the offtake site for these projects.

Christian Wetherbee -- Citigroup -- Analyst

Okay. No, that's very helpful. I appreciate that. And assuming sort of a normal course where the parent would potentially participate in the sort of the business development for those new projects. And then there could theoretically be a dropdown candidate, identified by the Partnership at some point in the future. I guess it's been a while since we thought a little bit about that, so could you sort of give us a sense of how you might think about sort of the funding of any potential dropdowns, willingness for incremental debt capacity? How do you think about sort of the equity valuation as it stands right now, trying to get a rough sense of how you guys are thinking about potential funding? I know it's early, but just sort of structurally or conceptually would be helpful.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah. First of all, I think on the next couple of dropdowns, you will probably see -- slightly higher leverage following the assets from the parent on that debt to EBITDA basis, than you have seen in the past. That means that there is, at the starting point there is less equity needed for the next few dropdowns than what we have seen in the past. I think the plan would be to the Partnership to raise equity, for the equity portion. And we could access both the common and the preferred equity market hopefully at that point in time, but it would have to be equity. But I think -- further considerations around which market to approach, we would have to make closer to a good transaction and where we then see where -- how the various instruments are priced. Again, the big picture slightly more leverage from the assets, which means that it's less equity needed than what we have seen in the past.

Christian Wetherbee -- Citigroup -- Analyst

Okay. Okay, that's very helpful. I appreciate the time. Thank you very much.

Operator

The next question will come from Greg Lewis with BTIG.

Gregory Lewis -- BTIG, LLC -- Analyst

Yes, thank you and good afternoon. I guess, I just had -- just following up kind of on that thought. As you look at your preferreds, I mean, right now they're yielding 6% as you look at the common equity, it's definitely been a tough couple of months here for MLPs. The yield is now at over 12%, it looks like -- on the equities on the equity side. How should we be thinking about cash flow and I mean should we be thinking about buybacks here? I'm just trying to get a better understanding of capital allocation, and when we try to balance the ability to the dropdown assets and grow the fleet versus potentially buying back some stock?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah, I think it's a good question. I think that's the main source of our allocation of the capital we have is likely to be used for growth, I believe. There is obviously at a point in time where we would consider using it more -- for maybe for buying back. But so far at least we have preserved capital for growth purposes. But we are continuously evaluating it there -- if we should use any funds for other purposes. But at the moment we have not taken any action in that direction. And I think as a starting point, at least as I said, we would -- the plan is to use the capital available for growth purposes.

Gregory Lewis -- BTIG, LLC -- Analyst

Okay, great. And then just prop on a little bit, I guess easier. As we think about the total FSRU -- FSRU fleet, yes, I mean about two-thirds of the fleet is committed to traditional FSRU work. Of the units that are not operating as FSRUs, are any of those on multi-year contracts, that potentially keep them out of the market in bidding on some of this work, that it looks like it's going to be bid on in -- over the next few quarters? Are those vessels all pretty much all just trading spot, I guess is my answer.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

No -- there was some trading spot, but we had some of them and they are on medium term contract. So what we have done -- what Hoegh LNG has done is to enter into between one and three year -- one and two-year contracts in carrier mode. So as I think, it's a mixture of medium-term and plus contracts.

Gregory Lewis -- BTIG, LLC -- Analyst

And I'm sorry -- I was thinking more beyond what's inside Hoegh, I mean like -- we have like any kind of view into the competitive landscape in terms of the non-Hoegh FSRU capable...?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah.

Gregory Lewis -- BTIG, LLC -- Analyst

Okay.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

So they are -- I think there might be one that's idle, but the rest is on short to medium-term LNG carrier contract. So as far as we know, none of them are in long-term carry contract. It's spot to medium-term, LNG contracts for all of those units except maybe one that's idle.

Gregory Lewis -- BTIG, LLC -- Analyst

Okay. Perfect. Thank you very much.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah.

Operator

The next question will come from Ben Nolan of Stifel.

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

Yeah, hi, good morning. So I wanted to follow up a little bit on, they go on which obviously comes off contract with Egypt and where you said you've exercised your option with HLNG. Just curious as you look forward, obviously HLNG would be trying to go out and find alternative employment on that, but is in your...

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

It's executed as is, and -- or it's employed on -- I'll turn to employment. I think from the Partnership perspective, we have the five-year option to lease it to the -- to five years. And it's then -- the alternative would then be alternative long-term employments. But I could see rights that we exercise this and then at the later stage, we then converted from a time charter contract with the pair into a time charter contract with a third party. But in terms of our relationship with the parent, I can only foresee 90% of the current rate and nothing else than that.

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. And if, let's say the parent were able to get a alternative employment, but it was perhaps below that 90% threshold you could maintain your contract with the parent and they just make up the difference?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah, I mean the situation then, would be that we lease it to the parent and the parent will then employ it in the interim markets, maybe as carrier and then it's likely that it depends well -- to an lesser amount, that they are paying the Partnership, because the rates that you can earn in the carrier market at the moment is less than 90% the current rates.

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

Right. Well, and that sort of gets me to my next question, which is based on the tenders and some of the work that's being done primarily at the parent to get contracts, long-term contracts, as FSRUs on the vessels. Can you maybe guide us to sort of at least maybe give a range as to sort of where the market is relative to maybe the carrier fleet for long-term business, and what kind of a premium is available for an FSRU relative to carriers on long-term business?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah, it's what we have seen as you know, over the last years, the rate in the FSRU market has been declining due to the competition. But it's still above the long-term carrier rates. We expect -- that we have hit the low point in this cycle and that we going forward -- will see increasing FSRU rates. I'm not -- and it's difficult to say how much premium we will get, but it is a more expensive vessel than a carrier. So we are getting premiums today compared to the carrier rate and we expect that to increase going forward as the FSRU market is getting more imbalanced.

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. So if may -- if let's say an FSRU is 30% more expensive in a carrier, can you capture that 30% premium in cash flows do you think? Or it's somewhat below that?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, I think we are not doing that today. We're not doing that today. But I think longer-term, we should be able to do that.

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

Okay, perfect. And then lastly just for me. As it relates, broadly speaking to the FSRU market, you mentioned in the slides that last year 2018 was a very big year in terms of FSRU awards. It's been three thus far this year, but there is a very big backlog, give any sense just from your conversations with clients and then those being done as a parent? If the cadence of contracts, if we're reaching some sort of a tipping point or something such that, there might be a lot of activity in the near term or is this in your view just going to be a little bit more staggered and spread out maybe than it was last year?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, you know, a lot of the project we have -- we're working on -- we have been working on for quite some time. I think there is -- I think Hoegh LNG and we think there is a lot of things going to happen next year, on projects that -- where there has been activity for some time and project that has come to markets. So I think we are positive to a high level of activity next year, but I don't want to predict by giving numbers, it is always difficult, things takes time. But we are certainly positive that there will be a good progress on existing and new projects going into 2020.

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

Okay. Does it -- I guess another way of saying it, does it feel like the pace of activity is speeding or it's not materially different than it was, I don't know, three, six months?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

No, I think, good progress is being made. There is not a material change in the activity. It's high. It's good. And so -- and we have good hopes for FIDs being made, several FIDs being made, also to Hoegh LNG's advantage in 2020.

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

All right. Well, I appreciate the time. Thanks.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Thank you.

Operator

The next question will come from Liam Burke with B. Riley FBR.

Liam Burke -- B. Riley FBR -- Analyst

Thank you. Good morning, Steffen.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Good morning.

Liam Burke -- B. Riley FBR -- Analyst

I think we've talked about this in the past, your existing projects require redundant capacity. If I look at existing projects, is there any need or demand to increase capacity, where you could probably could generate some more operating cash out of the projects that are currently up and running?

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Yeah, I think there is potential for increased activity, relating to the existing fleet. But that would, to a large extent, be to the benefit of our clients. Our client could make agreements with small scale operators to use our fleets to provide services in that respect. Now we might have to change slightly our commercial agreement with our client then. But that would only represent marginal, I think increases in revenues on the Partnership's had. So I think the upside relating to providing incremental service is relating to the small scale activities, for instance, at least with the current fleet is more at the end of the -- of our client. But in order to a lesser extent to our benefit. But we could see small changes, small improvements in earnings.

Liam Burke -- B. Riley FBR -- Analyst

Great. Thank you, Steffen.

Operator

And this concludes our question-and-answer session. I would now like to turn the conference back over to Steffen Foreid for any closing remarks.

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Well, then I would like to thank everyone for dialing in and for asking questions. And if there is any follow-up questions, don't hesitate to contact us. Many thanks.

Operator

[Operator Closing Remarks]

Duration: 34 minutes

Call participants:

Steffen Foreid -- Chief Executive Officer and Chief Financial Officer

Christian Wetherbee -- Citigroup -- Analyst

Gregory Lewis -- BTIG, LLC -- Analyst

Benjamin Nolan -- Stifel Nicolaus and Company -- Analyst

Liam Burke -- B. Riley FBR -- Analyst

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